I don't know who you refer to, but I think such a position is flawed.
However the reason why bailouts are sometimes warranted (why they are in the public interest) is that the operation of markets sometimes produces negative externalities which had not been adequately forseen nor protected against (and perhaps cannot be efficiently forseen nor protected against in advance--but that is another debate) and the government then needs to protect society from the externalities in the best way possible (in the best interest of the public again)
In this case the externalities are the net losses and negative net asset value of a plethora of portfolios of derivative securities constructed by the private sector in investment banking units of financial firms. They were legally entered into, regardless of whether the incentive structure that led to that was believed to be messed up or not (many people conclude that it was severely lacking). And yet the losses incurred have become grave enough in some cases to drive the owners of the securities into near or actual bankruptcy. Which is "fine" by itself, except that the near or actual bankruptcy of a large number of firms all at once risks inflicting indiscriminate net damage to others who were not involved in the transactions of buying and selling those securities, namely other businesses and society.
Nothing about free-markets prevents that happening, and a free-marketeer who is barmy enough to claim that negative externalities don't arise now has another large data point of empirical disproof.
Effective government oversight of markets ideally minimises the likelihood of catastrophic externalities hitting society. It does not look like the oversight in the system was very effective. Hence "crisis management" of various sorts that we have seen.
But make no mistake, the intention of government bailouts is to protect society, first and foremost--not to re-equitise private actors who have lost money for its own sake, although that may be a precondition for protecting society. If society is called on to make an up-front payment for that, it would be because the government believes that such a payment will work out cheaper than the outcome if the damage is left to progress unchecked.
It's up for debate what the most cost effective type of bailout could be, or even if one is needed perhaps (though there are few, if any, dissenters to the view that FNMA and FHLMC "could not" be allowed to stop trading such that the mortgage-backed bonds they guaranteed entered default). But the principle behind it is as I have laid out,conspiracy theories notwithstanding.
My current thinking is that the issue is that the current credit crunch and the cause of the Great Depression (ala Bernanke) is the issue that is scaring people.
This is fed by many weird and sundry issues.
1. The desire for profit (not a bad thing), it has caused some investors to seek huge profits, which is part of free markets (not a bad thing).
2. The passing on of the questionable loans after making the profit and perhaps the 'hiding' of the risk.
3. People loaning money that shouldn't have (which considering the small portion of high risk CRA loans is not the fault of the CRA).
4. People borrowing money that shouldn't have. For sure!
5. People assuming the housing bubble was a way to make money , so they purchased or borrowed money against house that they shouldn't have.
6. The current business model where loans are used to fund day to day spending, so people have to borrow to keep their business running.
7. The loss of the smaller banks, which fortunately seem to be generating again.
My thinking about the bailout is this, some people made very high profits. (Which is not a bad thing)? And the real issues of the credit crunch are real. Loss of housing, loss of pensions, inability of small businesses to function, increase in unemployment.
So my thinking is that the bailout should be focused on the consequences of the business cycle that people don't like, not bailing out the flawed high risk mortgage securities.
If the issue is that small businesses will loose credit, then that is what should be addressed, if the issue is that consumers will not be able to buy houses, then that is what should be addressed.
I disagree with interfering in the natural consequence of the business cycle. People sold houses they shouldn't have, people bought houses they shouldn't have. People sold securities that might have hidden the risk, people bought those securities. There are areas where the cycle and the free market need to address these issues.
