Hank Paulson looks like a quarterback calling audibles. He determined the "old" 750 billion bailout plan won't work, so he decided to spend the money on an entirely different program than the one authorized by congress. Neither he nor anyone else knows what these programs will do. Doesn't anyone in government understand central planning doesn't work? See the former Soviet Union, Mao's China, and Castro's Cuba for details. I make no claim to knowing how things would play out if congress butted out, but I am sure no one else does either. One thing is for sure. History has taught us that whenever the government tries to do things outside of its basic and necessary functions, it does massive damage to us all.
Allowing the banks and other business to fail would undoubtedly be very painful. The question is not that, but will the "solution" be worse than doing nothing. When a business fails in a capitalist system, either the debt holders replace the equity holders, or the business is liquidated and the money recovered is divided among the creditors. If that happens, there is less competition in that industry, making it more likely that others will survive. This is a painful process, but it works. All you Darwinians out there should buy into that.
First the government decided it would save the banks, and later extended the rescue to all manner of businesses- the auto industry, credit card industry, business finance etc. Of course in its infinite wisdom (and Democratic majority-although Bush is guilty too) congress decided that the consumer needs help, so a second stimulus package is planned, including mortgage assistance and an increase in unemployment benefits etc.
Who wouldn't love to help every struggling person in America? But under the banner of help what we are really doing is shooting morphine into a gangrenous leg rather than amputate it. The pain will go away for a while, but soon after the patient will die.