You mean, this won't work either?

OK, I guess Paulson and Bernanke need to start thinking about Plan C.

Plan A was the $700 billion bailout bill, without which we were threatened with Armageddon, if not martial law.  We know how well that turned out.  We got Armageddon anyway, the Dow and S&P each getting slaughtered 18+ percent the week after Congress finally snapped to Big Hank's marching orders (but only in exchange for $100 billion in tax breaks and subsidies for favored constituents, natch).

The problem, we were told, was that while the bailout served to take toxic "assets" off the hands of the banks, it did nothing to put "liquidity" back in the system.  In other words, the banks would take those shiny new Treasuries they traded in for the toxic stuff and use them to clean up their balance sheets, instead of using them to make loans to credit-starved businesses and consumers.

So, it was time for Plan B.  Paulson cooked it up late last week and presented it as a fait accompli to the big banking CEOs Monday afternoon.  Pretty simple: Uncle Sam would give $250 billion to the banks to buy up preferred shares.  This approach, we were assured, was what was needed to put liquidity back into the system.  Why, no less than the new Nobel prize winner in economics, Paul Krugman, said it would.

But wait, what's this?  "There is a risk that banks will take the new government capital and use it to bolster their balance sheets but still not resume lending," reported the Washington Post yesterday morning, "and the Treasury is not getting any specific contractual guarantee to prevent that from happening."

Same problem as before, in other words.  Seems as if this reality dawned on traders throughout Tuesday.  So much for Monday's "relief rally."  Paulson ought to change his name to Britney Spears:  "Oops, I did it again."

The problem, as non-Nobel prize-winning economist Jeffrey Miron of Harvard explains, is that no amount of "liquidity" means a tinker's damn without something else — "transparency."

If banks were fundamentally sound but temporarily in need of cash, they could sell stock on their own to private investors. Few investors now want bank stock, however, because they cannot tell which banks are merely illiquid — short of cash for new loans because their assets are temporarily sellable only at fire-sale prices — and which are fundamentally insolvent — short of cash and holding assets whose fundamental values are less than the bank's liabilities.

This lack of transparency is a crucial impediment to new investment, and therefore to new lending.

Government injection of cash, however, does little to improve transparency. A bank with complicated, depreciated assets is in much the same position after the government gives it cash as it was before, since outside investors will still have limited information about the solvency of any individual bank.

Miron advises government stand aside and let events take their natural course.  But as I observed yesterday, bailout opponents are, by establishment media standards, wackos.  Even someone with a Harvard pedigree like Miron.  He might rate a column at CNN's website as a zoo-like curiosity, but he's not worthy of an interview on CNN itself, or any similar outlet, where only the Very Serious People* in alignment with the Tom Friedmans and David Gergens of the world get a hearing. 

And when Hank Paulson says "jump," those folks say, "how high?"

*As Glenn Greenwald might call them, although he limits the term to matters of foreign policy