Most investors know that there's a difference between Democratic Party leadership and Republican Party leadership, as it relates to U.S. fiscal and economic policy.

However, although more economically-cohesive than the Democratic Party, the Republican Party is not monolithic, and there's perhaps no better example of these often nuanced differences in policy than the positions on home mortgage assistance policy held by U.S. Treasury Secretary Henry Paulson, and FDIC Chairman Sheila Bair.

Paulson has been slow on payment relief

Although he has shown support for mortgage refinance programs aimed at achieving lower payments - - 'payment relief' in Washingtonspeak - - Paulson has steered clear of policies that would mandate that banks unilaterally lower principals, or interest rates, preferring to stick with a voluntary approach, whereby banks basically negotiate with borrowers on a case-by-case basis.

That traditional Republican response, economist David H. Wang said, "has prevented mortgage refinancings from occurring for those who don't truly need them," but it also has increased the at-risk mortgage pool, delaying the housing sector's recovery.

A solution to the above, in Wang's view? Adopt the FDIC plan backed by Bair, whereby the Treasury would use its funds to speed refinancings for at-risk homeowners in owner-occupied homes. Wang agreed with Bair that the FDIC plan could prevent 1.5 million foreclosures by the end of 2009.

"It could prevent even more, perhaps as many as 1.8-2 million foreclosures, and until the U.S. ends these waves of foreclosures, very little good news will occur from a GDP standpoint, which is why Bair's plan should be enacted," Wang said. "I also think President-elect Obama should appoint her to a Special Advisor post in the Obama Administration, solving the home foreclosure problem is that critical to the nation's economic health."

Nero was a Roman emperor who was rumored to have played a lyre in his palace in July 64 while Rome burned for six days. And to paraphrase Mark Twain, history may not be repeating itself now; but it sure is rhyming. The 30 developed economies are receding -- expected to shrink 0.3% in 2009. Meanwhile, in the U.S., foreclosures are up 25% since last year and Wal-Mart Stores, Inc. (NYSE: WMT), which was thought to be the place everyone would shop in a recession, now forecasts fourth quarter earnings per share to be as much as 7% lower than analysts expected. And the S&P 500 has lost 41.4% of its value in the last year.

So why does this feel like Nero's Rome? Two things: Hank Paulson -- who has consistently made confident predictions that later proved to be wrong -- has done so again. And, Washington, which was required by the terms of the $810 billion rescue plan to report on its progress after 30 days, has missed its deadline. As I posted yesterday, Paulson admitted that his plan to save the world by using reverse auctions to buy toxic waste was DOA. But the subtext of speech was that he does not have a clue about what to do -- and he has his eye on the exit door.

Meanwhile, a special inspector -- to be appointed by Bush -- and a Congressional Oversight Panel, which was supposed to check the dictatorial powers that Paulson originally asked for, has no staff members. This means that the taxpayers do not know exactly where the $290 billion that Treasury has committed so far has been spent. Simply put, the economy is getting worse, the program to restore it is rudderless, there is no public information on how the money has been spent, and nobody is in a position to provide that information.

It's not exactly a repeat of ancient Rome. While I doubt anyone in the White House knows how to play the lyre, the global economy is going up in flames.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008. He has no financial interest in the securities mentioned.

So how are things going with the $810 billion bailout bill that Hank Paulson just had to have? Paulson pushed it by explaining that if it didn't pass -- and soon -- "heaven help us all." No doubt this religious appeal worked wonders in the Oval Office. But in the real world, not so much.

How so? Since October 3, when the bill passed, the NYSE index has lost $3.8 trillion worth of value -- declining 27% from 7,088 to 5,196. Did heaven help us when Bush signed the bill? I have no idea, but I am sure that anyone who owned stock is much much poorer.

But the poverty is not just the kind that makes it harder to retire or pay your children's college tuition, it's also the poverty of lost confidence in our government. That's because not only was the $810 bailout bill not the right cure for what ails the economy and the markets, the actual use of the money is completely different than what Paulson demanded urgently of Congress.

What is wrong with us? We gladly fork over $125 billion to capitalize a handful of banks that got us into this mess that's cost $37 trillion since 2007. But we can't muster up any help for people whose houses go into foreclosure. Why are we using our taxpayer money to give bankers the extra capital they need to pay bonuses while not requiring them to lend it out to keep the economy moving?

And why don't we do something to get to the root of this problem? That is the enormous borrowing of money to finance the purchase of houses many of which are worth less than the unaffordable mortgages taken on to buy them. When people have a mortgage that's bigger than the value of their house, they walk away. When others see their mortgage payments skyrocket while their incomes stay flat, they stop writing checks. And their houses go into foreclosure -- in the third quarter the number of foreclosures rose 71% to 765,558 -- the highest on record.

Hank Paulson said, "The government may buy home loans and related securities to help property owners struggling with monthly payments." It's nice of him to dangle that carrot in front of the three million people who have lost their homes to foreclosure. Obviously, it was much more urgent for him to secure the bonuses of his banker buddies with our tax dollars.

The $700 billion bailout plan that was pushed through Congress earlier this month has been expanded to allow financial institutions to exchange play money for cash as the Treasury looks to shore up the financial system and get credit markets moving again.

Congressman Ron Paul of Texas expressed skepticism about the idea: "I question how it is in the best interests of the American people to trade their hard-earned cash for play money bought from Dollar Tree. It's indicative of the tremendous fiscal irresponsibility of the current administration."

Treasury Secretary Hank Paulson dismissed the criticism at a press conference where he was flanked by a family size bottle of Pepto Bismol and a box of Cracker Jacks. "This presents a compelling opportunity for taxpayers, and the risk is really quite minimal. We are only paying 25% of face value for the fake money, and we're not accepting bills in any greater denomination than $500,000 -- even though you can get $1,000,000 bill bookmarks through the Oriental Trading catalog. Ya know why? Because we're prudent."

Congressman Barney Frank added that while the expansion of the bailout to include Monopoly money might seem brash, it's really not much of a change. "I mean look: we're already buying up mortgages on properties that were appraised at 300% of their true value before they were wrecked by hurricanes and turned into crackhouses -- so why not buy some Monopoly money?"

Many banks looking to cash in on the offer are scrambling to separate their real money from their fake money before the November 1 deadline for the exchange.

Full Disclosure: Nothing in this post is true.

Mark Cuban has a new pet project: BailoutSleuth.com seeks to keep readers updated on how their money is being spent as part of the $700 billion bailout of financial institutions.

So far the early returns aren't looking good. Yesterday the site's editor, Chris Carey, wrote that the "Treasury Department put out an announcement about a major bailout-related contract with Bank of New York Mellon Corp. that fell short in the transparency department."

The problem? Nearly all the information on compensation was redacted, leading to less than illuminating lines like this: "The Financial Agent shall receive a monthly fee ---------------------------------------."

It's hard to know what purpose is served by keeping taxpayers in the dark about how much Bank of New York Mellon (NYSE: BK) is being paid for its services. This reeks of the same contempt for taxpayers that characterized the passage of the bailout in the first place.

Concerned citizens should consider bookmarking BailoutSleuth to follow this travesty in real time.

Earlier this week, Hank Paulson forced the nine top banks to take $125 billion in taxpayer money in exchange for perpetual preferred stock that pays a 5% yield, which rises to 9% after five years plus warrants to buy 15% of the banks' stock. Does this mean that the banks will now start lending out that money to get the economy off its back? Absolutely not. It could go to paying banker's bonuses instead.

And why not? After all, the write-offs of sour investments have more than wiped out all the "profits" these banks reported over the last three years -- during those boom years they reported $305 billion in profits and have recently taken $323 billion in write-offs. And with more losses looming, the top nine banks need to raise $275 billion more.

How much of these reported bank profits were faked to boost banker's bonuses? Why are the bankers who booked these lousy deals keeping the multimillion bonuses they got during those years? And why did Paulson decide to inject taxpayer money into these banks if they're not going to use it to boost the economy?

The proposition that housing drives the economy is a pretty old and well-articulated theory. Housing values underlie the value of many of the mortgage-related paper held by financial firms. Falling home values have undermined consumer access to credit and people have been pushed out on the streets due to foreclosures.

Some economists say that there are hopeful signs housing will start to recover. The extra liquidity that the Treasury is putting into banks will improve mortgage lending. That theory is actually deeply flawed. Paulson can give the banks money, but he cannot force them to lend it. Big financial firms are just as likely, if not more likely, to keep the cash to use against future losses. Those losses may come due to mortgage problems. It is a perverse circle which may not be broken soon.

The weekend is fast approaching. And with global markets in a tailspin --- the Nikkei fell 11%, the Hang Seng tumbled 7.1%, and the FTSE 100 declined 3% -- that can only mean one thing: Hank Paulson and Ben Bernanke will spend the weekend putting together another massive cash dump to announce by Sunday night. But I have a different idea -- for one weekend, how about a massive information campaign instead.

What if, instead of trying to fight fear and restore confidence with money, they decided to educate the world instead? If Bernanke is such a good teacher, perhaps he can put together an explanation for what is going on, why it happened, and how he plans to fix it. I think that a patient and honest explanation of what is really going on -- similar to FDR's fireside chats -- would go a long way to pushing away the fear.

By uttering meaningless platitudes about how "we have the tools" and "the economy will come back better than ever", the Administration is sending an unhelpful message. It is telling us a combination of things: it does not understand what is going on, it does not trust the American people to handle reality, and/or it believes that discussing the truth would make matters worse. Throwing more money at the problem without providing leadership does not seem to be working. Here are a few questions I think Paulson and Bernanke should answer for starters:

Over the past few years, the line between news and spin has grown thinner and thinner, to the point that it is no longer visible, even with the most advanced scientific instruments. In fact, according to most physicists, the line can only be detected by the infinitesimal gravitational pull that it seems to exert on surrounding particles, like faith in democracy, trust in authority figures, governmental accountability, and the inexplicable popularity of Perez Hilton. As a consequence, real-life causes and effects, decisionmakers and victims pale beside the far flashier waves that rustle through the covers of magazines and the ranks of the punditry. In the end, the past few presidents have demonstrated that truth is less important than "truthiness" and events are less important than titles.

In this spirit, the time has come to put a name on the economy's current crisis. As some talking heads have already noted, the Bush administration made a major mistake by allowing the term "bailout" to define the government's response to the economic meltdown. John McCain proposed the term "rescue," which sounds far more noble, while Treasury Secretary Henry Paulson suggested calling it the "Troubled Asset Relief Program," presumably hoping that a really boring title would make taxpayers forget about the issue. Using the same logic, petty thieves are now lobbying to have the term "pickpocketing" replaced with the monicker "involuntary, extralegal, above-market thigh massage."

As had been expected, The Treasury will begin to take equity positions in major U.S. banks. According to MarketWatch, "The plan calls for banks to be recapitalized with public and private funds, but makes no specific mention of another common suggestion."

The part of the plan that is rarely mentioned is that the government could end up owning huge percentages of very large banks. Citigroup (NYSE: C) has a market cap of $76 billion. What if the Treasury has to put $25 billion of equity into the big bank? The agency might not want to have a board seat, but it would need to have a substantial say in what happens with the financial firm. Otherwise, how are the shareholders protected?

It would be better for the Treasury to give banks very long-term loans. It would be less risky for taxpayers if the debt was senior to all other debt and common shares. And, someone in the government would not have to look over management's shoulders to make sure the average citizen was likely to get his money back.

Douglas A. McIntyre is an editor at 247wallst.com.

The U.S. Congress' rejection of the $700 billion rescue bill generated a predictable response from private banks late Monday night. The cost of borrowing rates surged the most on record as banks were increasingly reluctant to lend to one another.

The London Interbank Offered Rate, or LIBOR, rose an astounding 431 basis points to 6.88% Monday night, Bloomberg News reported Tuesday.

Meanwhile, the Euro Interbank Offered Rate rose to a record 5.05%, reflecting cash hoarding, rising fear, and a breakdown in normal trading.

Economist David H. Wang told BloggingStocks he expects overnight interest rates to remain abnormally high until the U.S. Congress passes a rescue bill, or U.S. and international leaders find another mechanism to get bad assets out of the financial system.

"There's plenty of liquidity in the system. The problem is no one is lending to one another, and that's fear, basically. Until we implement policies to reduce and eliminate fear, the fear problem is going to grow and there will be more bank failures and other failures," Wang said. "There is no end in sight for this crisis until the psychology has been changed."

The dollar rose early Monday against the euro, pound and yen, but for all the wrong reasons -- a belief that more banks in the U.K. and Europe will face pressure and Europe's economy will slow further.

The dollar rose almost 2 cents versus the euro to $1.4367 and 3 cents versus the British pound to $1.8035. The dollar also rose about one-quarter yen to 106.25 versus the Japan's yen.

Currency Trader Andrew Resnick said the dollar's merely modest rise against the yen is the telling indicator in this currency market. Typically, a dollar rally would spark a large move up versus the yen as well, not just a minor increase. The fact that it hasn't indicates that institutional investors are paring-back their carry trades on concern the U.S. Congress' $700 bailout / rescue bill may not be enough to check the financial crisis, leading to slower growth in Europe, he said.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) such as Japan [the yen], and buy assets in a country where returns are higher. The investment can take many forms including stocks, bonds, funds, or even the higher-interest currency itself, such as the British pound.

Metaphors sometimes oversimplify, but think of the U.S. Congress' 2008 bailout bill (pdf) as a long-overdue oil change for the U.S. economy.

Still, as any driver knows, an oil change is not enough to keep a car running well. You need to have it tuned, and keep all of its engine, transmission and related systems maintained for the car to perform safely. So next up for the U.S. economy: a tuneup.

But regarding the rescue, if it goes reasonably according to plan, the U.S. Treasury, and the companion agencies the rescue creates, will slowly remove distressed / bad assets from the financial system, and in the process both stabilize the credit markets, and equally important, restore confidence in the financial system.

Of course, there's no guarantee the rescue will work as intended, but there was near unanimous agreement in economic and investment circles about what would happen without it: a freezing-up of the credit markets, contagion in stock and bond markets, panic, and a substantial reduction in the ability of companies small and large to function. In short, the worst financial panic since the stock market crash of 1929 that led to the Great Depression.

Some investors/readers -- and certainly casual observers of the stock market in towns small and large -- have been perplexed by the turn of events that has led to the current state of affairs in these United States: namely how and why does the U.S. government need to pass a $700 billion bailout/intervention bill to end a financial crisis in the U.S., possibly globally?

While numerous economic, regulatory, and behavioral factors created the conditions that formed the basis for the crisis, economist Richard Felson told BloggingStocks that the imminent failure of insurance giant American International Group (NYSE: AIG), in his view, "was the flashpoint at which both [U.S. Treasury Secretary Henry] Paulson and [U.S. Federal Reserve Chairman Ben] Bernanke realized that a case-by-case, reactive policy would not be adequate to check the building financial storm."

No AIG, massive exposure

Felson pointed out that at least a portion of hedge fund trades -- and the trades of other financial institutions -- are predicated on the assumption that mortgage-backed securities are good/have value, or, if not, that the insurance behind these securities is in force as a result of policies written by AIG. When it became clear that AIG did not have the assets/resources to pay claims, it was necessary for the U.S. government to take over AIG via a $85 billion loan from the U.S. Federal Reserve for warrants for a 79.9% stake in the company.