Does Anyone Up There Know What the Hell They're Doing?

As you are probably aware, a feared seize up of the credit markets and the disaster that would entail for the nation's economy is what finally drove the Bush administration and Treasury Secretary Paulson to propose a massive bailout of the financial sector. Incredibly, $700 billion is proving to be insufficient grease for the wheels:

The Treasury Department on Wednesday officially abandoned the original strategy behind its $700 billion effort to rescue the financial system, as administration officials acknowledged that banks and financial institutions were as unwilling as ever to lend to consumers.

But with a little more than two months left before President Bush leaves office, Treasury Secretary Henry M. Paulson Jr. is hoping to put in place a major new lending program that would be run by the Federal Reserve and aimed at unlocking the frozen consumer credit market.

The program, still in the planning stages, would for the first time use bailout funds specifically to help consumers instead of banks, savings and loans and Wall Street firms.

Treasury officials said they hoped to invest about $50 billion from the bailout fund into the new loan facility, with the aim of helping companies that issue credit cards, make student loans and finance car purchases.

As envisioned, the Treasury would put up about 5 percent of the money that a company would use for lending and private investors would put up perhaps 20 times that much by buying bonds issued by the new program.

This is the latest and most dramatic shift in the bailout program. If you'll recall, the original idea was to directly purchase the bad debts from banks, taking the bad debt off of their hands so they would be willing to resume lending. That didn't work. Then the goal became to buy equity in the banks, thus giving the banks billions to lend with. That has proven to be insufficient, at least at the scale the Treasury is conducting the program, as the banks have mostly sat on the cash. Now the Treasury will turn its attention to this strategy in full:

Mr. Paulson conceded that he had scrapped the plan he originally sold to Congress in September, which was to have the Treasury Department buy hundreds of billions of dollars worth of illiquid mortgage-backed securities in order to free up banks to resume normal lending.

The program is still called the Troubled Asset Relief Program, or TARP, but it will not buy troubled assets. “Our assessment at this time is that this is not the most effective way to use TARP funds,” Mr. Paulson said.

Instead, Treasury will step up its program of injecting capital directly into banks and, for the first time, expand it to include financial companies that are not federally regulated banks or thrifts.

In case you're wondering where the money has gone thus far:

The Treasury has already committed about $290 billion. It has allocated $125 billion to the nation’s nine biggest banks and investment banks; another $125 billion for publicly traded regional banks; and $40 billion to expand the existing bailout of American International Group, the insurance conglomerate that collapsed in September.

Now I know September already seems like a lifetime ago, but I well remember economic analysts and pundits in the media at the time arguing that it made much more sense to buy equity in the banks and inject cash directly rather than buy up troubled assets. It's taken the Treasury and the Bush administration two months to come around to this notion. How far behind the curve are they now?