The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules. ~John Berlau

There are real reasons why the dreaded word stagflation has started circulating again.  The bailout genuinely increases the chances of recreating such miserable conditions.  The choice before us is not between nasty economic contraction and the sunny uplands of ceaseless growth, but between a normal, painful, but ultimately healthier adjustment or another artificially-induced mess.  This is not to turn around the apocalyptic warnings of the pro-bailout crowd and deploy the same kinds of alarmist arguments, but I do want to stress that there will be real negative economic consequences that will result directly from the implementation of this plan.  The counterargument is that it will stave off a worse danger, but this is very questionable.

Here’s Reihan in Forbes offering some very positive comments on Luigi Zingales’ restructuring proposal that I mentioned last week.  Reihan:

In a stinging essay, Zingales essentially argued that Paulson was offering welfare to the rich. Rather than pay premium prices for toxic assets, Zingales called for the federal government to craft a restructuring plan that would involve some amount of debt forgiveness or a debt-for-equity swap, saving taxpayers billions and imposing well-deserved financial pain on the reckless creditor who created the mess in the first place.

So why did the GOP go along with such a profoundly flawed approach? If you can think of a better reason than laziness or cowardice, let me know.

Don’t forget stupidity–that’s always a possibility.