No one, in my opinion, can distill economic theory for the layperson better than the late Henry Hazlitt. In this article, Econ professor Scott Kjar channels Hazlitt and shatters the popular notion that the financial bailout will "inject new capital and liquidity" into our financial markets:
"The argument that the government is somehow pumping new capital into the market is absurd. Government is actually borrowing the money from the capital markets that it is in turn injecting into the capital markets. There is no additional source of funding; there is only a diversion of funds from more-productive outlets to less-productive outlets, with government acting as the middleman.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn’t bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets. He is doing little more than rearranging the deck chairs on the Titanic; shuffling the money from one set of financial intermediaries to another does not increase either liquidity or solvency. It merely delays the problem for a few brief moments."
In other words, either we are borrowing more money from whoever the lenders of last resort are in order to “pump liquidity” into the broke lenders and printing more money to pay them back, or we are simply bypassing those intermediaries and just printing more money to give the broke lenders directly. In either case, we’re making the money worth less, which is a formula for a death spiral.