I cashed out of the market before the '06 election and I agree with your analysis.  The bailout is appalling, not for its stated intent of unfreezing credit markets but for its total disconnect between the actions undertaken and any certainty of obtaining the desired effect. Sec. Paulson has already spent enough money to accomplish the stated objective, but done it in such a way as to prevent it from being much more than a gift to his cronies.

$250 billion injected into banks with toxic balance sheets does not restore confidence in or the willingness of those institutions to lend.  Too many knowledgeable people still fear what might be on their books.  If your water supply has been poisoned, diluting that supply with a known pure additional few percent of water is useless.  The only possible solution for that existing supply would be to filter out the poison.

That takes time and a solution is urgently needed.  I have suggested standing up new, untainted banks with about that amount of capital.  They could make loans and provide credit.  Bruce McF has suggested turning conservatively run credit unions into full service banks with commercial lending capabilities.  It would also be possible to beef up upgraded credit unions or to inject capital into some of the many local and regional banks that have been well and conservatively run.  A thorough inspection of balance sheets and draconian penalties for misrepresentation would be required.  

The Federal Reserve and FDIC could also just purchase the commercial banking divisions of contaminated banks for fair value and merge them into healthy banks, along with new capital in return for senior preferred stock.  If they can force partial nationalization on the big boys, they could do that as easily.  It is shameful that they haven't moved in this direction.

"It is not necessary to have hope in order to persevere."