Sweating out a fevered economy

[FarrenH]

Before making my point let me say I'm not an American, just a South African with a left-liberal bent and an interest in US politics, which is why I read DU, among other sites. I'm also largely unschooled in the minutae of financial markets.

From my limited understanding, there is no way to ensure that a government bailout of Wall Street's failing giants will ultimately provide some return on investment to US taxpayers. Even attaching dozens of riders will only help taxpayers recoup their losses if the company's bailed out manage to extract enough profit from the situation to stabilize their medium-term future and still pay back the massive government loans. But there's a good chance these companies will be more liquid in the short term, but still unsound in the longer term, even with a bailout.

I've seen repeated references from more financially astute individuals to the whole thing being a Ponzi scheme, where good money is being thrown after bad and the economic headache is simply being postponed - and increased. Given that this is the second of two major bubbles and was itself at least partially engineered to paper over deficiencies in the US economy exposed by previous crisis, my intuition makes me lean towards this view.

My more financially clued-up friends say that the US has been sustaining growth on hot air for close to a decade, indicating structural weakness that seems unlikely to go away simply because financial companies were bailed out as a short term fix - and that a general downward correction is the only sensible route to a sustainable situation.

In light of this, is it possible that the best solution is, in fact to let these financial giants fail, ride out the consequences and try to build real value in the aftermath, instead of more papering over? Is that simply politically impossible because of the stakes at the moment? Or are some of my assumptions wrong?

ETA: http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4074948">I see someone's already posted an active thread on this in GD

ETA2: I'm actually in favour of a Keynesian approach to economic management, where government takes up the slack where necessary. But it strikes me that such intervention should only take place to correct imbalances caused by a lack of liquidity in real value. To this naive observer, the current crisis appears to have arisen out of exactly the kind of Bank-driven false-value creation that Marx (correctly) predicted would create boom-and-bust cycles in unrestricted capitalism.

ETA3: I see Ezra Klein articulates some of what I'm trying to say http://www.prospect.org/csnc/blogs/ezraklein_archive?month=09&year=2008&base_name=all_bad_even_if_it_gets_better">here. And its ironic that Tom Wolfe, Bush-lover and Bonfire of the Vanities author, has provided the inspiration for the "masters of the universe" subtext that's going around.