You're confusing the bailout and the stimulus, which are two separate things.

The bailout is TARP and related programs (like the auto bailout), which are intended to support failing businesses that are deemed critical to the continued functioning of the economy. (Watch this to understand why.)

The stimulus (aka the American Recovery and Reinvestment Act) isn't about propping up failing businesses, it's about generating demand for goods and services to make up for consumers and businesses shutting their wallets as the economy turned downward. Stimulus money will go to things like building roads, schools, and bridges, creating domestic sources of green energy, weatherizing homes and Federal office buildings, supporting state and local governments hit by cratering tax revenues so they don't lay off teachers, firefighters and cops, and so forth.

I could argue your philosophical objections, but that'd be a subject for a different post. My point here is just to illustrate that they all relate to the bailout and don't really apply to the stimulus, which actually has the potential to catalyze the creation of new industries in sectors like renewable energy and high-speed rail transport.

Side note:

Honestly, would you sign a lease on the smallest, cheapest apartment if the landlord could change their side of the lease at any time without your consent?

Credit card companies can change the terms of your agreement with them at any time without your consent. They do it all the time.

Long after the money was given - some bank presidents have said under duress - the terms of the loan changed.

Under duress? There are banks that refused TARP funds, nobody's sending their directors to Gitmo or anything.

The reason why the Treasury was so hot on every bank getting TARP money was, paradoxically, to protect the banks. When they moved to bail out only the banks that were in immediate crisis (first Bear Stearns, then AIG), the announcement of the bailout served notice to the market that those banks were in crisis, and their stocks hit the floor, killing them. By making TARP a systemic program, this signaling problem was removed.

And what terms changed, exactly? The TARP funds were handed out with remarkably few strings. The whole point of TARP was to inject capital into the banks so that they'd start lending again, but most of them took the money and didn't restart lending. They used it to gobble up competitors instead. And yet none of the CEOs who did that are being prosecuted for taking public money and using it for purposes other than they accepted it for.

Sure, there have been calls to add additional restrictions to future TARP outlays, but that's inevitable given that they didn't use the money to lend, which is the whole reason we (you and I and every other taxpayer) gave it to them.

The government's "generating demand for goods and services to make up for consumers and businesses shutting their wallets" is the definition of "propping up failing businesses". I'm not sure of any other way to interpret it...

There's a distinction between businesses that are failing because of factors that are within their control and businesses that are failing because of factors outside their control.
Even well-run businesses are at risk right now of being swamped by the economic crisis, so they're doing the rational thing: cutting expenses, pulling back and trying to save to get through the crisis.

And because of that we're at risk of falling into a "deflationary spiral". In times like these, it's entirely rational and prudent for businesses to tighten their belts. But when every business does that at the same time, it creates a systemic crisis: businesses pull back production to save money, which leads to layoffs, which leads to consumers spending less, which leads to businesses cutting production, which leads to layoffs, and on and on until you're looking at another Great Depression.

That's what the stimulus is intended to correct, by having the government serve as the "buyer of last resort" when businesses and consumers are (quite rationally!) holding back. The only alternative is to try and convince businesses and consumers to act voluntarily outside their self-interest, which, you know, good luck with that.

Finally, if you look at the government's current investments in various renewable energies and high-speed rail transport, you'll see what they really are... handouts.

Was the Interstate Highway System a handout? Was the Internet a handout?

Those are two examples of Federally-funded infrastructure projects that created entirely new sectors for economic activity. They didn't hamper prosperity, they catalyzed it. No private company would have built the Internet; the up-front costs were too steep and the returns too distant for it to make sense on a profit/loss statement. But the government built it (the Defense Department doesn't care too much about return on investment, for good or ill), and it unleashed a wave of entrepreneurial creativity, as did the highway system, which created opportunities across the country for hotels, restaurants, tourism attractions, and freight transport.

If you want to see innovation and advancement in these areas, stop strangling the innovators.

The geniuses who came up with the credit default swap, the instrument that turned what would have been a moderate downturn into an existential threat to the global economy, were pretty innovative. And I bet there's a whole lot of people (including many on Wall Street) who wouldn't mind a chance to strangle them right about now ;-)

Hi Keith, this is a good discussion to have.

A lot of people on both sides of the aisle object to the way TARP was executed. Too few strings, and the banks took advantage of that.

Here's an analogy: we discovered a tire on our car had a leak. But we decided we don't want to use the spare tire. So instead, we attached an air tank to the leaking tire, and continued driving on it while we pumped air into it continuously.

That was the purpose of the bailout, to keep the economy operating without having to wait for the banks to sort their mess out. Perhaps it would have been better to use the spare tire while we patch the leak properly.

In retrospect, it might have been better to create a new national bank with a limited charter (like Alexander Hamilton's First Bank of the United States), and assist otherwise healthy businesses who were in cash-flow trouble only because the banking industry was in chaos.

That would have let the banking industry clean house without taking down the rest of the economy in the meantime. The banks need to resolve their "toxic asset" problem through normal market processes. They are already doing this as we speak, but there are so many assets to go through that it will take several years.