When the Treasury finally abandons its bailout programs and/or the executives at the cash-hemorrhaging finance companies finally exhibit more humility than chutzpah, the economy and the stock market will have reached the bottom.

But it doesn’t feel like we’re there just yet…

So far, the Treasury Department, Federal Reserve and FDIC have cobbled together about $2 trillion worth of bailout programs, along with an unknown-trillion-dollars worth of implied and actual guarantees. What do we have to show for all of this financial firepower? Nothing more than a smoldering pile market capitalization and implausible declarations of victory.

Bailouts aren’t all bad, they’re just mostly bad. They’re bad because they tend to subsidize failure, rather than to underwrite future success. Failure consumes capital investment, success multiplies it. Like UN food programs, bailouts tend to land in the hands of crafty despots, rather than needy orphans. In other words, bailouts tend to produce exactly the sort of capital misallocation that prolongs economic stasis and impedes recovery.

When the TARP tosses billions of dollars at a hodgepodge of finance companies, for example, does it actually save anything of long-term economic value or does it merely preserve museum pieces?

The Treasury has funneled $150 billion into the AIG cesspool, but the beleaguered insurance company continues to stink up the place. The company just posted a fresh $25 billion loss in the third quarter, and is probably amassing another multi-billion-dollar losses for next quarter. And yet, somehow, in the tortured logic of the powers that be, it’s okay to waste $150 billion on AIG, but not to waste $25 billion on GM, Chrysler and Ford.

The logic, if you can follow this, is that AIG’s failure would be a “systemic risk,” GM’s failure would merely be a catastrophic. To be clear, GM doesn’t deserve a bailout any more than AIG does…or any less. AIG miscalculated in such a spectacular fashion that it will receive six times the money that GM will NOT receive. Does that make sense?

In some ways, yes. No one wants a systemic risk walking around on the streets. But at the same time, what do we gain over the long term by resuscitating a model of incompetence like AIG, when we could be investing billions in lots of competent enterprises.

If the brain trust at AIG did not realize that policy-holders sometimes file a claim, too bad for AIG. It should go bankrupt. A blind monkey could write an insurance policy without considering the risk of a claim. A blind monkey could also figure out that if you write lots of policies on the identical risk – or family of related risks – you can kiss your actuarial assumptions goodbye. But blind monkeys almost never rise to the top ranks of a major insurance company.

We’ve got nothing against blind monkeys, but we don’t believe they should receive multi-billion bailouts from the Federal Government. Because, you see, when blind monkeys fail, sighted mammals can take their place, and usually operate a business more successfully. That’s called, “Economic Darwinism”…and we could probably use a little more of that about now.

If we’re going to waste $700 billion…or $2 trillion…let’s waste it on the folks who are building successful businesses…not on the folks who have demonstrated a penchant for colossal failure. Alternatively, let’s waste it on the folks who are trying to save their homes. In other words, let’s waste it on the effort to restructure existing mortgages. As a last resort, we could waste $2 trillion subsidizing journalists who write daily financial columns containing the words, “Rude Awakening.” But this would truly be a last resort.

If the government really wanted to INVEST the TARP funds, rather than squander them, it would buy a $25 billion interest in America’s nine BEST companies (whatever those might be). But that’s not the TARP’s mission. The TARP’s mission is to throw good money after bad, with the hope that the bad money becomes good again.

Good luck.

The TARP, itself, is a troubled asset. In fact, this particular tarp is beginning to look an awful lot like a shroud – an ornately embroidered gossamer that the Treasury Department is wrapping around the lifeless remains of the financial sector. The Treasury Department continues to insist that this shroud…er, tarp…will restore the financial sector to new life and vitality. We don’t believe it.

The financial sector is more King Tut than Lazarus. It will not come back to life, at least not in anything resembling its current form; it is dead already. The pyramids and the gold and the perfumes did not make King Tut any less dead. His 5-star Egyptian mummification/spa treatment did not bring him back to life. Likewise, dressing the ashen frame of brain-dead finance companies in $700 billion worth of bailout baubles will serve only one purpose – to send $700 billion into the afterlife as well.

Don’t send your money there too. Beware the financial sector…still.

Source: Bailout Fatigue Syndrome