The insolvent banks need to be allowed to go bankrupt. The bondholders and shareholders in these banks need to take their losses. Investments in a bank are liabilities for a bank. If the investors in the banks take a heavy hit, the balance sheet for the bank at once improves. This makes it much less expensive for the government to come in, throw out management and reorganize the banks. When FDR reopened the banks they did not need bail out funds six minutes later. FDR reopened solvent banks.
The market has no idea where to value itself while the government throws hundreds of billions of dollars into these insolvent major financial institutions. This bailout is wrongheaded.
One fear about allowing the banks to go bust is that this would be deflationary. But this is the beauty of allowing the banks to go bust.
A stimulus plan is inflationary. If we let the banks go bust Obama can spend all he wants on his stimulus plan. He can even expand it into single payer health care, high speed rail and mass transit.
But if we keep pouring money into these insolvent banks and we turn on the printing presses for the stimulus, we will just ruin the ecoonomy and the value of the dollar.