The problem with Capitalism is that when it doesn’t work, everybody expects a quick fix.

My original thought in September was that the U.S. government should never bail out financial institutions, especially using taxpayer money.

But the Treasury can’t undo what’s been done, they can only consider what TARP is actually doing to relieve a one-year-old recession and a tumorous financial crisis.

If you ask me — and I’m sure if asked Adam Smith — Corporate America needs to lean from its mistakes and accept that a free-market economy has its pros and cons. The more we soften the collapse of embattled corporations, the less likely those business will ever make genuine changes in how they run their operations or how they cut corners to make a bigger profit.

And the more our government tries to clean up the mess, the more likely future generations of American consumers, businesses, banks and investors will make the same mistakes.

The intervention between JP Morgan and Bear Sterns was tolerable. It was less a bailout in my view than an aggressive push. But it also flipped open a Pandora’s Box.

TARP is becoming a well-recognized mistake and any similar initiatives given to the auto industry would show equally lame results. Yet the Big Three have their open palms out now.

Goldman is sinking. Citi is imploding. And U.S. taxpayers are out $700 billion. Why would Ford, GM and Chrysler prove any different?

Here’s a solution: Take all that bailout money, put it towards education and start teaching finance and economics to kids in elementary school. Make it part of the core curricculum in all public and private schools all the way up to high school.

Vikram Pandit, Citigroup CEO

Late last night, the government and Citigroup came up with a radical plan to stabilize the huge financial conglomerate.  The Citigroup bailout dwarfs some of the federal government’s stabilization plans for other companies, with the government planning to directly invest $20 billion in Citigroup, and agreeing to back $306 billion of their loans and securities.  Why Citigroup and not Lehman? Well, Citigroup definitely falls in the category of ‘too big to fail.’  

The massive financial company has over 200 million accounts worldwide, employs over 350,000 people (though is planning to lay off 50,000!), and is a major dealer in U.S. Treasury securities.  The magnitude of a Citi collapse would shake up Wall Street in ways few of us could even imagine- a market earthquake that could have made October 2008 look completely rosy.  So far, Wall Street seems to be responding favorably to this latest bailout, with Citigroup (NYSE: C) up 52 percent for the day.  Last week, the market ripped apart Citi, with its stock losing half of its value in four days.  In the past four quarters, Citi has consistently posted losses, and its consumer loans seem now as toxic as its mortgage-back securities.

How will the government pay for the losses it’s guaranteeing through public money? Citigroup will absorb ten percent of its losses, and the government has agreed to absorb the other 90 percent.  First, the Treasury Department will absorb the first $5 billion in losses, the FDIC will bear the next $10 billion, and the Federal Reserve will guarantee any additional losses.

This morning, president-elect Obama announced his economic positions in his cabinet, attempting to both calm Wall Street and the larger American public.

“Right now, our economy is trapped in a vicious cycle: the turmoil on Wall Street means a new round of belt-tightening for families and businesses on Main Street,” said Obama.  ”As folks produce less and consume less, that just deepens the problems in our financial markets. These extraordinary stresses on our financial system require extraordinary policy responses. And my Administration will honor the public commitments made by the current Administration to address this crisis.”

Obama’s speech came at a critical time, with the radical plan for Citigroup just announced, and increasing anxiety about unemployment, foreclosures, and the auto industry.  ”The news this past week, including this morning’s news about Citigroup, has made it even more clear that we are facing an economic crisis of historic proportions,” said Obama.

Wall Street’s mood has been nervous or skittish at best during the past month and a half, and whether even the investment of billions of dollars of public money into Citigroup will continue to reassure investors remains to be seen.

Obama's Econ Experts At Press Conference This Morning

This wouldn’t be as much of a problem if state governments didn’t have state laws or constitutional amendments that demand a balanced budget. They just can’t run a deficit and be done with it (what would the federal government do if that was the case in D.C.?). Many states were in a precarious position with the slowdown in the economy and the credit crisis has only exacerbated their woes.

But what is bad for state governments could be good for investors.

Just like any huge enterprise, state governments need to borrow money to keep running smoothly. Many of the largest states in the United States fund a lot of their garbage collecting and street cleaners by issuing short-term bonds of less than a year. And with the credit markets clogged up the amount of interest (or the coupon) they have to offer on their bonds is going up. It’s a necessary step because a state like California just can’t stop paying the 340,000 people it employees in its public schools, so it’s going to have pay more to borrow.

So this means those doing the borrowing are going to make more coin. And while New York and other states have put off doing a huge bond issue, California started one today in which the state hoped to sell $4 billion worth of bonds. Bloomberg reported earlier today that investors had bought half of the bonds.

And why wouldn’t they?

The yield on sixth-month treasuries are at 0.93%. For California bonds maturing in May the coupon rates were between between 3.75 and 4.0 percent and for ones maturing in June the rate was 4.25 to 4.5 percent. Last year the state sold these kinds of bonds at 3.37 percent. So lets say that that California’s coupon rate is an average of 1 percent more than last year. That means the state is paying about $25 million (hard to figure because I don’t know how many of each kind of bond was sold) more in interest to borrow $4 billion now than it would have paid last year. And the state is only borrowing the money for less than a year.

One investor didn’t hesitate to take advantage of California’s financial woes. Gov. Schwarzenegger bought $100,000 worth of bonds today. For a guy who is worth a reported $100 million, the bond buy isn’t a bold move, but it looks good politically and when he collects his coupons in the next few months he probably won’t mind either.

And just for a good laugh, here is the youtube clip of the Governator at the 2004 Republican convention.