Liquidity vs. Insolvency

Paul Krugman explains why the blank-check bailout looks more like an end-around than a solution..

...Historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets. The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the RTC. The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.

The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions.
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And there’s no quid pro quo here — nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I'm no expert, not even close. But if this crisis amounts to throwing money at otherwise technically solvent banks before they fail because they can't generate liquidity, and that phantom liquidity proceeds without reform or regulation and leads to insolvency anyway, then this bailout is just a $700 Billion golden parachute that protects only the ones who created the problem in the first place.