After almost four months of trading in a dominant sideways pattern (except for the Nov. 20-21 bear trap), the government now provides some hope of "stimulus" and, just as important, a new bank bailout plan. So, despite the fear readings from the public, more savvy investors with lots of cash appear ready to put some of that money to work.

On Friday, I spent some time comparing the similarities of the 2002-'03 bottom to the current chart patterns of the major indices and the CBOE Volatility Index (VIX), concluding that it looks like the conditions are present to get a meaningful rally underway.

If you agree that the market is poised for a move higher, the question is, "what sectors and stocks should I buy?"

You have to appreciate the cleverness of this era's financial humor. (Note that I said, appreciate the cleverness, not love, or enjoy. That's because, depending on your perspective, the humor is either on-the-mark, or not that funny. But that is part of the subjective nature of humor.)

One joke making the rounds:

Question: What's the capital of Iceland?
Answer: $25.

Another: In the old days, banks lent money to people. These days, people lend money to banks.

New York Times (NYSE: NYT) columnist and Nobel Prize-winning economist Paul Krugman discusses bank capital and lending in his most recent column, and argues that the apparent likely Obama administration fix for the banking sector -- a combination of U.S. government purchase of toxic assets and guarantees against losses on other assets, each on terms favorable to the banks -- represents a lousy deal for the U.S. taxpayer, who'll end up "footing the bill for rescuing the banks."

It's a Washington, D.C. adage -- one that can help investors understand the public policy process -- and House Financial Services Chairman U.S. Rep. Barney Frank, D-Massachusetts, among others, have said it a dozen times, if not more:

"Congress doesn't get credit for not doing something or for avoiding something," Frank has said.

Case in point: TARP I, the initial $350 billion allocation in Troubled Asset Relief Program funds. The initial allocation has been widely criticized as ill-conceived. Some of the money has apparently enabled certain banks to approve large bonuses, allowed others to complete acquisitions or position themselves for the same, or pay-down debt, while not resulting in what Congress intended the allocation to accomplish -- increase lending to businesses and consumers.

With public indignation and Congressional outcries building concerning large Wall Street bonuses while the U.S. taxpayer bails out the same industry that contributed to the financial crisis, efforts to limit or eliminate excessive compensation may hinge on whether the Obama administration wants to use political capital to do it.

The public attention-grabbing incidents are certainly there to keep the U.S. Congress focused on the issue: Wall Street allocating its sixth-highest level of bonuses during the investment banking sector's worst year since the Great Depression. Former Merrill Lynch CEO John Thain's decision, since reversed, to use $1.22 million in company money to redecorate his office, is one example. Another is Robert Rubin receiving more than $100 million in compensation from Citigroup (NYSE: C), a bank that's receiving hundreds of billions of dollars in government guarantees and other, direct financial assistance.

How would you like it if the government spent $4 TRILLION to bail out our banks? How would you like it if this $4 trillion amounts to 1/3 of our Gross Domestic Product?

We started with $700 billion. Then now there is talk of setting up a 'bad bank" to buy up toxic assets. Then some people started tossing around $1 to $2 trillion. Now we are up to $4 trillion..Goldman Sachs says that 4 trillion is their estimate. Senator Schumer and a group experts have also come up with the $4 trillion dollar number The IMF has estimated $2 trillion for this year.

At the same time the Obama team wants to take bold action to solve this problem once and for all.

Dear Mr. President: Use the next $350 billion of TARP and set up a "good bank" that is solvent and let the banks take their losses. They created this mess. Don't worry about big banks going bankrupt. You will gain immediate support from the American people. An like Lincoln who said: "My paramount object in this struggle is to save the Union," so too our primary goal is " to save the Union," not the banks.

Simon Johnson, a former IMF chief economist and MIT professor, estimates it could cost $4 trillion to bail out our banks. That's $3.25 trillion more than we've already allocated to the problem. Johnson, who argued on behalf of nationalizing our banks last week (a position I debated with him), bases his calculation on the 5% to 10% of GDP that other nations have used to bail out their banks (I think his math is off because 10% of U.S. GDP of $14 trillion is $1.4 trillion).

As posted, I would approach the problem differently. First, I would create new banks that could lend money instead of using it to buy $50 million corporate jets while cutting back on lending after receiving $45 billion in bailout money. Second, I would send an army of financial engineers to reverse securitize all that toxic waste that's causing the huge losses. This process would separate out the, say, 10% of mortgages in default from the 90% of mortgages whose holders are still paying.

It's not often that I urge readers to listen to a radio debate -- but there's a first time for everything. The reason for my recommendation is that the government could soon nationalize our banks -- something that has never really happened in our history. And I think you should consider listening to this radio debate yesterday on KCRW's To the Point with Warren Olney involving a former International Monetary Fund Chief Economist, a reporter from the Washington Post, a blogger from Portfolio, and yours truly discussing the pros and cons of nationalizing the banks.

It's not precisely clear what it means to nationalize our banks. In general, it means that the government takes control of the banks and runs them. In many cases, such as Bank of America (NYSE: BAC) and Citigroup (NYSE: C), the U.S. is already the largest shareholder thanks to the $45 billion each we invested in Bank of America and Citi. In fact, these investments exceed the value of their publicly-traded common shares -- which are valued at 81% and 38% of that investment, respectively -- Bank of America ($36.5 billion) and Citi ($17 billion).

This highlights one of the negatives of nationalization -- common shareholders who are among the innocent (and often ridiculed) victims of managements' poor decisions get wiped out. In theory, the board of directors is supposed to protect the interests of the shareholders. But in the case of the banking industry, they made sure that the executives and "top producers" got enormous bonuses by letting them take on risks that put the financial system at risk -- creating a $2.2 trillion capital shortfall. While my fellow radio debaters argued for nationalization, I argued against it.

Outgoing U.S. Treasury Secretary Henry Paulson stated goal was to have banks "deploy not hoard" TARP money as a part of process to loosen constrained credit markets.

In advocating such, the outgoing Bush administration hoped that banks would work with homeowners at risk of losing their homes to foreclosure.

Some banks have worked with struggling homeowners, offering alternate payment plans, loan forbearances, or even lowering the interest rate to help get these mortgages back in the non-delinquent category. Still, the practice has by no means been universal.

Many banks have not participated in mortgage modifications -- even those banks that received TARP funds. For example, a Palm Beach conference sponsored by Sandler, O'Neill & Partners revealed how many banks are using their TARP money, The New York Times reported.

The U.S. Treasury, U.S. Federal Reserve, FDIC's joint decision Friday to inject $20 billion into the Bank of America (NYSE: BAC) and guarantee $118 billion in assets provides another case study. Bank of America's shares fell 80 cents to $7.52 in Friday afternoon trading.

[ Earlier, my BloggingStocks colleague Peter Cohan provided an analysis of the bail-out's cost to taxpayers. ]

Economists and other public policy wonks love the theoretical and they love 'taking the other side' in arguments.

Hey, they can't help it: it's the stuff they were trained to do - - the stuff they love. And, after all, it's frequently a major source of their income.

And my economist and policy wonk colleagues and friends are no different.

Now, on the surface, it looks like yet-another taxpayer bailout of bad decisions by bankers, mortgage lenders, and borrowers. In other words, another "profits - - the bankers win, losses - - the U.S. taxpayer foots the bill." Further, because it occurs on the heels of the Bank of America's buy-out of Merrill Lynch, it looks like, in some sense, U.S. taxpayers are subsidizing a financial institution merger.

The typical American's tolerance for federally rescued banks and other institutions that continue to award bonuses? Very little.

Three-quarters of Americans say Goldman Sachs (NYSE: GS), Citigroup (NYSE: C) and other bailed-out and taxpayer-assisted companies should cancel all bonuses this year, a new Bloomberg News / Los Angeles Times poll shows.

Further, a majority of respondents also said the U.S. government should have a voice in how these companies are managed, while two-thirds favor tighter financial sector regulation. The poll was conducted December 6-8.

Economist Richard Felson said it's understandable that Americans would express concern about bonuses in financial institutions that accepted federal assistance.

"Awarding bonuses does send the wrong signal. It's also arrogant in the view of many citizens. In our nation, hundreds of thousands of taxpayers are being laid-off with no federal assistance to cushion their loss of income, and down the street a bank executive of a bank who received federal bailout money could be collecting a $300,000 bonus. It gives the appearance of the federal government paying for these bonuses . . . paying for large compensation despite these business flops," Felson said. "It's an arrogant and incorrect policy."

Yet another milestone has been reached in the ever-evolving global economy: China has passed Japan to become the largest foreign owner of U.S. Treasuries, the U.S. Treasury Department announced Tuesday.

China added $43.6 billion in U.S. Treasuries in September to about $585 billion in U.S. government debt, ahead of Japan's $573 billion.

Economist David H. Wang says the increased demand for U.S. Treasuries reflects both a global trend and an effort on China's part to increase high-rated bond holdings.

"In general, of course, during the financial crisis we've seen a global flight-to-safety by institutional investors, which has increased demand for U.S. government bonds," Wang said. "Also, China has made it known that it will be adding to existing U.S. bond positions, and the September data is further confirmation of this investment stance."

That global demand, led by China, has enabled the United States to have perhaps the most unique of all possible financing circumstances: moderate interest rates to finance its debt despite rapidly increasing borrowing to pay for the U.S. bank rescue and related financial stabilization programs, Wang said. For example, despite record government borrowing, the yield on the 10-year U.S. Treasury note is lower today, at 3.68%, than it was in August, 3.88%.

Bonuses for a U.S. Government-rescued Wall Street should take on a 'slightly' leaner tone, according to a sampling of U.S. taxpayers by Bloomberg News. The taxpayers' judgment regarding how large the bonuses should be? Zip. Nothing. Nada. Niet.

Wall Street, which created many of the Frankenstein-like financial instruments that either distorted and/or hid loan risk, and also in some cases encouraged the issuing of problematic mortgage forms, is not justified in paying bonuses, and certainly should not award them following the government's massive $700 billion bail-out of the industry, a sampling of U.S. taxpayers indicated.

One U.S. resident, Ken Karlson, a 61-year-old Vietnam War veteran who lives in Illinois told Bloomberg News, "I may not understand everything, but I do understand common sense." He added, "the bailout money should not have been given to them in the first place."

Economist Richard Felson told BloggingStocks Tuesday acrimony from U.S. citizens is not outlandish or unreasonable given the facts to-date of the current financial crisis.

Talk about a large amount of funding in a quarter.

The U.S. Treasury Department, weighed down by unprecedented obligations for the bank rescue and a slowing economy, is expected to borrow a record $550 billion this quarter, compared to the pre-financial crisis estimate of $142 billion, the department announced.

Further, the $550 billion bond issuance follows a record $530 billion in borrowing in Q4 of fiscal 2008, which ended September 30.

In addition to the bank rescue and related programs, the slowing U.S. economy has also increased Treasury borrowing by reducing federal receipts and increasing outlays.

The U.S. Government closed fiscal 2008 with a $407 billion deficit, according to the Congressional Budget Office (pdf). The CBO projects a $438 billion deficit for fiscal year 2009, but economist Richard Felson said the total is likely to approach $1 trillion if the bank recapitalization and toxic asset repurchases proceed along outlined timetables.

"These are staggering sums of debt and it's hard to envision the dollar holding up long-term, given such borrowing," Felson said.

The senate yesterday approved a bill aimed at stimulating the housing market. According to the AP: "The plan contains $4 billion in grants to local governments to buy and refurbish foreclosed homes, new authority for states to issue bonds to be used to refinance subprime mortgages, and a temporary $7,000 tax credit for people buying new homes or properties in foreclosure."

So the Senate decided that local governments should get $4 billion to get into the real estate "flipping" market. They will buy these homes, fix them up and then re-sell for a profit? Is that the business government is supposed to be in?

Most local governments have problems fixing potholes and keeping streetlights working, and our wise senators believe that they will solve the housing crisis?

The real problem right now with foreclosed homes is that the banks refuse to bite the bullet and sell these homes for lower prices. I have spoken with a few people in the real estate market trying to buy foreclosures and they all said that the banks aren't prepared to take a loss. So now here comes the senate and says let's give $4 billion to local governments and they will overpay the banks for these properties. Great, so in an election year the US Senate has basically screwed prospective home buyers, choosing instead to bailout the banks.

What a surprise.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/3/08