On the main site, I try to take a big picture look at the financial crisis and bailout plan, but just wanted to add a few things.

I don’t think that conservatives who are supporting the plan have fully considered how it means the end of capitalism, and the beginning of European-style socialism in the U.S. I don’t think I’m exaggerating.

As a result of the Fannie and Freddie bailout, the government already has fingerprints on most of the nation’s mortgage debt; as a result of the AIG bailout, it now controls 80 percent of what was once the world’s largest insurer. In both cases, the government has assumed the power to fire and hire top management. In reaction to the Paulson plan, Democrats in Congress are moving to restrict executive compensation of companies seeking taxpayer help, as well as give the government shares in the companies. And within the logic of the bailout, can you blame them? If Paulson wants to socialize the risk that financial institutions have taken, than how could anybody argue that the resulting profits shouldn’t be shared by all? The result, however, would be the government having an ownership stake in every major financial institution, as well as a say on who gets paid how much.

And that is just the direct result of the Paulson plan itself, without taking into account the regulatory battle that will take place in the next Congress. Paulson’s plan will make it more difficult for conservatives to prevent a regulatory overreaction along the lines of Sarbanes-Oxley, which drove business overseas. The Democratic Congress (and quite possibly, president) will simply not dole out $700 billion to Wall Street in the fall, and come next spring, show restraint when it comes to imposing a new regulatory regime on the financial sector. Investors have no loyalty to America, and will quite happily put their money elsewhere if American regulation becomes too burdensome.

As for those “illiquid mortage assets” that Hank Paulson says need to be removed from the system, Roger Lowenstein (who wrote the definitive account of the collapse of the hedge fund Long Term Capital Management as well as the best bio of Warren Buffett on the market) makes this illuminating point:

Paulson, the former Goldman Sachs banker, whose stock when he cashed out in 2006 was worth half billion dollars, is sure to argue that the appropriations are necessary because the market is illiquid. Yet a market for mortgage paper still exists. “Sellers just don’t like the bids,” a hedge fund manager told me. A manager with a big money management company confirmed that if Citigroup, Goldman, and the rest want to unload their securities, his firm has money to spend. “We just can’t spend as much as Paulson,” he noted.

That is really scandalous. The prospect of Paulson opening a giant $700 billion checkbook, in other words, is preventing the markets from working the problems out by themselves.