This post is inspired by a challenge from Stewart Feil, who gave me simply the title and wanted to see what I would write when I looked at it.
Bailouts are more like the inadvertent governmental way of cornering markets, making the government the 'only' market for something. This happens because once the government starts buying something (shares in a company above price, long end of the treasury curve, etc.), everyone will essentially hold out to sell to the government, so as to get the "screw the taxpayer" price. Bailouts also have the effect on the receivers of holding risky behavior in esteem, and the effect on the rest of the market of increasing mistrust.
One bailout begets another; or, at least it does if you don't realize your philosophy completely sucks, and that you can't out-maneuver mathematics. It softens, widens and deepens the collapse of debt default into a down-trending, see-saw shape. The default has to happen to relieve the exponential growth in debt, but bailouts distort and prolong the process. They introduce mistrust in the market environment, destroying the meaning of prices. Many groups (from the porn industry, to autos, to homebuilders, to banks) demand a bailout, and everyone else waits to buy because they don't know who is going to get favored next. Bailouts ultimately drag out the eventual re-establishment of a solid bottom, which is necessary for true, proper linear economic growth from real production.
The other problem with bailouts is that, to be blunt, it's like trying to treat a burn victim with a blowtorch. We have a huge debt problem. Debt is defaulting, causing total money/credit to contract (read: deflation) back to sustainable levels. This *must* happen, because banks and the Fed serially blew bubbles in the market to just kick the can down the road, and the can was getting bigger, and bigger. Bailouts of necessity require an increase in debt or a decrease in savings, which is precisely the problem that got us here in the first place. And, once you have a few patrons addicted to debt, they don't get broken of the habit without some really bad hangovers, and have to fall on their face a few times before they realize you are serious about cutting them loose. This is as true of corporations as it is of individual people. The longer you go giving out bailouts, the harder it will be to cut off the freeloaders later, and so it goes until your hand is forced. In the meantime, you will have done yourself likely serious harm in terms of solvency. There is no "right amount" of capital to give out that will turn a recession around; companies, and people, are black holes when it comes to money. Those who manage it well don't need bailouts, even when they are bankrupt, and those who don't will never manage it well even if they get bailed out. What's even worse, is the government is bailing firms out with *our* money, not theirs. See the following for a funny, but accurate depiction of what is going on:
http://patrick.net/housing/contrib/Fannie.jpg
Recursive bailouts are predicated on the people who have the power to give the money out either ignoring, or not understanding these simple truths. The average person, and thus the average company, is not so unlike a homeless guy that you give $4 million. Generally speaking, he'll blow it in no time and not be better off in the long run. If you think that means you just didn't give him enough, then you are throwing good money after bad and are a complete fool.
The parallels to what our government is doing are quite obvious.
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