America is more communist than China is right now. -- Jim Rogers, Sept. 10, 2008

A lie told often enough becomes the truth. -- Vladimir Ilyich Lenin

What if someone were to tell you that our government, without any oversight, was going to spend hundreds of billions of dollars of taxpayer money to buy near worthless items on eBay ( EBAY) at whatever price they believe is appropriate, using the justification that it will stimulate the economy?

I believe this would seem pretty ridiculous to most people. Yet, the government's current plan of buying extremely hard-to-value toxic assets is remarkably similar to the eBay example. Here's why.

Although bankers and politicians swear that the financial markets will be saved and credit markets stabilized by this plan, no hard evidence really exists to support their claim. They are really saying "just trust us" like a used car salesman trying to explain why you don't need a warranty on a 1977 Ford Pinto. Whenever I hear that phrase, especially from politicians, I reach for my wallet.

The bankers and politicians say that "smart" people like Hank Paulson and Ben Bernanke will protect the taxpayers' money and, if we don't spend this money buying troubled bank assets, the stock market will crash, credit markets will freeze, and we will enter a second Great Depression.

Of course, Paulson and Bernanke are the same geniuses who got us into this mess in the first place, but now they are somehow the most qualified to get us out of it. That doesn't make any sense to me.

As for the stock market crash fear, it crashed in 1974 and 1987, and there was not any Great Depression afterward in either case. As for credit markets, they're already frozen exactly because of the actions promoted by Paulson and Bernanke for the last year. Their inconsistent and often unexplained meddling with the markets has created a hostile business environment. In this highly uncertain environment caused by government meddling, market players are understandably afraid to do anything.

Here are just a few examples of unexplained and inconsistent government actions in the past year. Why did Bernanke and Paulson save Bear Stearns and commit public funds but allow Lehman to die in bankruptcy with no help at all? Why did Paulson nationalize Fannie ( FNM) and Freddie ( FRE) and wipe out their shareholders but then allow AIG ( AIG) investors to keep some equity and stay privately owned and publicly traded?

Why did the bailout or rescue, depending on your point of view, only come up when it looked as though Goldman Sachs ( GS), Paulson's former employer, was going to fail? Why did the government orchestrate the forced shut down of Washington Mutual ( WM) and Wachovia ( WB), yet many other banks with similar problems such as Citigroup ( C), Corus ( CORS), Downey ( DSL) and National City ( NCC), have been spared or even protected? None of this has ever really been explained. When pressed, they go back to stock phrases, referring to "systemic risk" that really mean one thing: "We are smarter than you, and you have to just trust us."

Bankers and politicians say that the government needs to save the $62 trillion credit default swap market from collapse, but how can $700 billion fix a broken market that is nearly 90 times the size of that amount of money? The total derivatives market, which is the real source of the turmoil in credit markets, is $1,400 trillion.

That is 200 times the size of this $700 billion rescue plan. If either the credit default swaps market, which involves companies placing bets on and insuring risk against the likelihood of default on different types of bonds, or the derivatives market is really broken and going to collapse, this relatively small amount of money will not stop that process from happening.

The most recent and most disturbing proposal that is being promoted by lenders and politicians is an attempt to abolish fair value accounting. What this means is that lenders do not need to mark their assets to what those assets could be sold for in the market. Both regulators and auditors oppose this plan to eliminate, or water down, fair value accounting.

Nevertheless, the banks and their political friends are asking investors and taxpayers to "just trust them" about the value of these assets on bank balance sheets. If it already weren't obvious, this is the most blatant attempt yet by the "fat cats" on Wall Street and in Washington to sucker investors and the taxpayer. It's also strikingly similar to what the Japanese banks pulled off after their bubble burst with government support, and we know how well that worked. It took Japan more than a decade to work through its banking crisis.

It failed miserably and probably made their problems a lot worse. Is that the outcome we want here? My view is that the further away we move form honest and transparent markets, the worse this crisis of confidence is going to get.

The bottom line is that socialism, even for rich and so called "smart" people, does not work. If socialism did work, we wouldn't need a market at all. We could just have really "smart" people tell us what to do, what to think, and what to pay for everything. Somehow Wall Street and Washington insiders believe that they can ignore this very basic concept and get away with it. Their arrogance and ignorance of basic economics seems to me a lot like the way Wile E. Coyote thinks he fly for a while after he runs off a cliff chasing the Road Runner.

I am sure that Paulson, Bernanke and other promoters of these rescue plans mean well. They believe that we need these extreme measures right now to avoid a meltdown, so I understand their position. But their plans will not stop a meltdown if the problems are really as bad they seem. Further, meltdowns, as painful as they are, are a necessary part of capitalism. They do not cause depressions. Depressions are caused by governments that prevent the market from correcting itself and therefore choke off economic activity. This is what happened during the 1930s in America. It was onerous regulation, tax hikes and the New Deal that prolonged the downturn. We are in this mess right now because of government meddling by Alan Greenspan, who kept interest rates artificially low for too long and inflated the credit bubble.

What would work to correct the financial system? First of all, we should emphasize transparency at all of these banks and other lenders. That means wiping out the equity, unsecured debt and senior management pay packages at insolvent companies. The government could then facilitate the absorption of this failed enterprise into a better capitalized and managed company such as JPMorgan Chase ( JPM) or Wells Fargo ( WFC). Or, the government could provide new equity for the recapitalization of those companies and also replace management in those situations with more competent executives. This restructured entity would then have a recapitalized balance sheet and a new management team that would have some credibility with investors and market players.

Second, bank deposit insurance should be increased to at least $500,000, and similar insurance should be provided for money market accounts to avoid a possible run on the banking and money market system into Treasuries.

Third, the government and the Fed should inject liquidity into the corporate and municipal bond markets. Both of these markets have been frozen due to all of the fear and uncertainty in this environment, combined with the capital limitations of the banks that normally support these markets.

The government is already doing this for the mortgage market, so it would also just level the playing field and stop unfairly favoring mortgages. Any liquidity provided by the Fed for these operations would be short term and, if not repaid in full, would ultimately result in the equity of the entities that borrowed the money taking those losses first.

Fourth, create a transparent auction process for the toxic assets of lenders in public view and allow any investor in the world to bid on them. This means placing these toxic lender assets on the equivalent of eBay and getting the highest bid.

If the lenders don't like the highest bid, they don't have to sell. However, the government would then have a transparent market price by which they could evaluate these toxic assets. That would become the basis for determining if the bank is solvent or not and taking appropriate action as explained above.

I want to believe that we can work our way through these problems with a sensible and transparent process built on sound economic principles rather than a process built around secrecy, back-room deals, power grabs and fear. I hope we have learned something from history about the dangers of making policy decisions based on panic and a rush to judgment. Maybe I'm too much of an optimist. We'll see.