So, after figuring out that his original plan wasn't going to work, Hank Paulson has now decided to reward his Wall Street buddies with a "capital infusion" in nine big banks -- most of which are located in New York City, and all of which have large divisions or subsidiaries that act very much like "brokerage firms".

Not only does this reward bad behavior by the people responsible for this crisis, the likely consequences of this move are pretty horrible.

1) The first consequence is that non "Paulson" banks are going to be in trouble. Large depositors (institutions, corporations, and individuals) are likely to conclude that the Paulson banks are far safer places to do their "banking", and will transfer their deposits to the Paulson banks. And while the reported plan includes 100% deposit insurance for all banks, that is only a temporary provision -- it may allieviate the threat of an immediate run on the non-bailed out banks, but the moment the 100% deposit insurance is lifted, deposits will flow toward the Paulson banks. (Indeed, corporate depositors will practically be compelled to do so, because corporations have to act in the best interest of their stockholders, and that means putting their uninsured cash in the lowest risk banks).

2) The likely result of capital being moved to the Paulson bank isn't failure of the other banks, rather its further consolidation of the banking business in these nine banks as once solid banks go into technical default, and get grabbed up at bargain basement prices by the Paulson banks. In other words, these institutions were already "too big to fail" and the Paulson plan makes them even bigger, while hurting everyone else.

3) The impact of this consolidation is going to hurt any city or region that doesn't have the HQ of one of the nine banks. There is a strong relationship between the health of a "local" or "regional" bank, and the overall economic health of the city or region -- and these local/regional banks invest heavily in their communities in terms of both making loans, and in the overall culture of these areas. Once a corporation like Citibank takes over a local/regional bank, its corporate charter requires that it act in the best interest of all stockholders -- in many/most cases, that means less investment and involvement designed to sustain/improve the economies the local/regional banks once served.

4) The reason that these institutions needed to be bailed out was because their "investment" divisions made high-risk investments that lost money in pursuit of maximum return on capital. If the Paulson plan works and "confidence" is restored, regulations designed to reduce the risk of future bailouts of these banks will result in a flight of capital from those banks to unregulated "brokerage houses" as investors demand the maximum return on their funds -- not only does this threaten the liquidity of the Paulson banks, new "morgan stanleys" and "Goldman Sachs" are going to emerge very quickly, and will recreate the same kind of problems that let to the current crisis.

The only solution to the crisis is the de-commodification of money; computers and rapid communications have resulted in a world where maximum profits can be achieved through arbitrage, i.e. by moving large sums of money around to take advantage of small, if not minute, differences in the price of assets. Money itself is what is making money -- the value of the underlying assets has become irrelevant.

In order to de-commodify money, disincentives (in the form of graduated transaction taxes) will have to be imposed internationally -- and assets transferred to banks/brokerages in non-compliant countries will have to be highly taxed as well. That's really the only way to restore sanity to the international financial markets -- and until such a regimen is imposed, the current crisis will be repeated indefinitely.