Financial Bailout

Surprised though I am that other contributors to this post haven't beaten me to the punch, the prospect of massive government intervention in the financial sector is too tantalizing to pass up. I will exercise restraint only insofar as sticking to a rather esoteric academic point, albeit a very important practicial consideration. Others can pile on to those public figures unwitting enough to already be embroiled. (If only those drawing lessons had panned out--today would be a great day to be an editorial cartoonist.)

Judging from the recent behavior of the current and prospective future administrations, Congress in all its sordid manifestations, sundry pundits of all stripes, and our central bank(ers), I'd venture that little thought has been given to the implementation of any bailout plan. Full stop. So what is the optimal way to throw $700 billion at the financial sector? Carpet-bombing Wall Street with bags of cash? Opening the "bad security" window to all comers? To all domestic comers? Targeting certain actors? (magnificant corruption/campaign contribution potential) Or should the eggheads engineer a reverse auction? Perhaps, to borrow a bit of jargon, we need to design a market for bad debt? Or we could all hearken back to our darkest days of solving mechanism design problems, and identify the social welfare function we seek to maximize. Actually, that might be a really good thing for Hank Paulson to do...