Here’s the silver lining to global financial collapse. It’s kept me from obsessing about Sarah Palin and McCain’s latest whopper for the last week. Except in the context of financial collapse, for which there’s been plenty of material.

What’s fascinating is watching this in the blogging era. Roughly a billion serious economists are online, and are writing about Paulson’s bailout plan in more or less real time. What’s emerging is partly politically driven (it’s getting very hard to find any economist, left or right, who’s seriously backing McCain), but also perhaps disturbingly divorced from traditional ideological divisions.

The (idiot) right doesn’t like the bailout because it’s not letting markets do their thing. I’m not sure there are many of these folks, outside the mouth-breathing politician class. Markets can fail catastrophically, and while this may seem like a salutory thing to some, if we’re living in a market-based economy, it’s not really a practical object lesson.

But a very large number of economist types seem to be seriously skeptical of the plan as presented, for two main reasons.

First, it gives the government — read, Bush’s executive branch and its successor, as advised by the Fed — virtually unlimited power to spend $700 billion without any kind of genuine oversight. Granted, most people  seem to be pretty happy with the way Paulson and Bernanke have played defense over the past few weeks. But imagine the lobbying that will go on. Remember the way that the Bush administration has staffed important agencies such as Iraq’s Coalition Provisional Authority, FEMA, or the Interior Department’s coke-snorting oil- and gas-royalty division.

The other arguments are tied closer to the economics. The massive sum will be used to buy the mortgage-backed securities that the financial sector has been binging on for years, and which no prudent investor will now touch with anything short of a gas mask and rubber gloves. Worse than Bayerisch Gammelfleisch, this stuff.

The short version of the theory is: Take these currently worthless “assets” off the financial giants’ hands. Instead, give them taxpayer money, filling their coffers with actual assets. This, in theory, makes them financially secure. Investors stop fleeing financial stocks. Banks once again start lending to each other, and to regular people trying to buy houses, start businesses, or conduct business in the ordinary credit-dependent way that makes the world economy tick. Best of all, in the end (as when the government bought distressed savings & loan assets in the 1980s), the “worthless” assets purchased today might actually turn out to have some value once the crisis passes, home prices stabilize, and people turn out to be able to pay their mortgages. Government sells them, the $700 billion or however much we laid out to rescue the financial system gets partly paid back, and everybody goes into the history books happy.

Yes. But.

One big question is how much the government is paying for the all-but-worthless assets. There are various opinions on what they’re worth. The market, for example, is currently pricing sub-prime mortgages as the rough equivalent of belly button lint. However, it’s unlikely that the banks are going to see it that way when they’re selling.

The Naked Capitalism blog quotes a reader who claims to be a congressional staffer thusly (read the full post here, it’s a very good critique of the plan):

Anyway, I wanted to let you know that, behind closed doors, Paulson describes the plan differently. He explicitly says that it will buy assets at above market prices (although he still claims that they are undervalued) because the holders won’t sell at market prices. Anna Eshoo pressed him on how the government can compel the holders to sell, and he basically dodged the question. I think that’s because he didn’t want to admit that the government would just keep offering more and more.

This puts the government in a tricky situation, and may perversely give the banks more power than they deserve. The government, once this is passed, is going to want to clean the mess up as soon as possible. Banks, by contrast, are going to want to get the best price they can for their trash. If they can manage to stay out of bankruptcy long enough, they’re going to be able to stick taxpayers for an unjustifiably high price.

Paul Krugman amplifies on this idea, arguing that the financial sector’s capital deficiency stems from hugely overleveraged (debt-financed) operations, rather than solely from the mortage-backed paper.

Even without panic asset selling, the financial system would be seriously undercapitalized, causing a credit crunch — and this plan does nothing to address that.

Or I should say, the plan does nothing to address the lack of capital unless the Treasury overpays for assets. And if that’s the real plan, Congress has every right to balk.

There’s more, but this post is getting long.

So what’s all this mean? We need a massive plan, and fast. That much is evident. We’re teetering on the edge of chaos far worse than anything we’ve seen since the 1930s. The lesson from the Depression is that the Hoover government did precisely the wrong thing for years, cutting back spending instead of stimulating economic activity, and making a number of other mistakes that virtually no Econ 101 student would today. Bernanke knows this, and is playing the professor-with-power role to the hilt, to make sure that today’s government doesn’t make the same sins of omission.

But it’s worth remembering that this is a democracy, and that Congress should play a role. Safeguards should be in place, and some ability to make Wall Street firms, and individuals, bear the brunt of the cost for their own salvation. Negotiations are underway now, and Democrats are just getting back in the game. This thing probably shouldn’t be approved as is (This pissed-off email, purportedly from a leftie Congress member is great. Quote: “I don’t really want to trigger a world wide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those mother fuckers.”).

Interesting times.