The most frightening thing about the financial bailout plan offered by U.S. Treasury Secretary Hank Paulsen is that before it can be implemented, it must be digested and approved by Congress. Already, the political hacks in both houses, and in both parties, are trying to deliver what’s best for their favorite special interest groups.

In the end, no matter who gets the credit for it, there are basically three things that can logically be done to achieve financial stability once more in the securities markets.

Franklin Roosevelt dealt with a somewhat similar scenario nearly seventy five years ago. First he recapitalized the banks. That’s what Secretary Paulsen’s plan calls for. Roosevelt then re-regulated the banks, and the federal government must do that this time too. Finally, Roosevelt delivered help to the folks on Main Street. The current plan does the same, protecting ordinary investors, and depositors, but it also places a safety net under Americans who got themselves into burdensome mortgages they knew at the outset they couldn’t afford.

President Roosevelt adopted Herbert Hoover’s 1932 Reconstruction Finance Corporation, but he modified it in a manner that required that the U.S. government receive preferred stock in banks and Wall Street corporations that received help. He even had government appointees placed on corporate boards.

The Paulsen plan doesn’t go that far, and perhaps it should. The federal government will get shares in the companies assisted, but not preferred stock, and the management of the bailed out firms will still be fully independent, required only to make periodic reports to the Treasury Department. The Paulsen plan also has an ominous feature that must be debated. It waves judicial review, which means no shareholder of the affected companies could seek a judicial remedy if seriously harmed by the process. I’m not too keen about that.

Finally, just like the Roosevelt plan, the Paulsen plan means huge deficits. Everyone accepts that the alternative, total economic collapse, would be worse.

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