Bernanke's boondoggle

Matt Yglesias:

I just heard Ben Bernanke saying that there should be no “punitive measures” for companies that participate in a bailout because that might discourage firms from participating. But that would be the point, right? That if some measure of bailing out is truly necessary then the money will be provided, but it shouldn’t just become handouts for bankers. Punitive measures mean that only firms that genuinely have no alternative will enter into the program, and their corrupt or inept managers will be duly punished. Firms that would merely prefer free money to no free money will, by contrast, stay out of the program and avoid punishment but suffer some financial loss. What’s the problem with that?

I thought this was about saving the banks from imminent mass bankruptcy; why would they possibly consider "not participating?" If saying "no thanks" and holding onto Big Shitpile is a legitimate alternative for the banks, what are we bailing them out of?

Consider also this article from the Wall Street Journal (c/o TPM):

"We're opposed to adding provisions that will affect [or] undermine the deal substantively," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, whose members include the nation's largest banks, securities firms and insurers.

A deal killer for the group: a proposal that would grant bankruptcy judges new powers to lower the principal, interest rate or both on a mortgage as part of a bankruptcy proceeding.

A deal killer? Since when was this a deal? We're giving free money to banks, supposedly to save them from annihilation, and they're giving us conditions on which they'll accept the money?

I'm becoming more convinced by the day that we may be going about this all wrong, and that these 2 former investment bankers running the Fed and Treasury are looking at this crisis with a banker's priorities in mind. If all these write-downs at the end of the day, all the mortgage-backed securities and credit-default swaps and whatnot, are caused by mortgages that are going unpaid, shouldn't we maybe consider taking that $700 billion and using it to help people pay their mortgages? I mean, if the choice is between those who made stupid buying decisions and helping those who willfully conned them into taking on debt they couldn't handle, who would you help? Or perhaps, alternatively, setting up a sovereign wealth fund to invest in those banks rather than just a handout, thus entitling us to dividends if the banks start making money with that new capital?

And why $700 billion? How can Paulson be so sure when he's been so abjectly unprepared and unable to see this crisis coming? Why should we have any confidence whatsoever in his judgment?

UPDATE: I discovered after I wrote this that Bernanke comes from academia rather than Wall Street. For some reason I thought they were both from Goldman Sachs.