There has got to be a joke in here somewhere. The recent “fact changing” excuse that Henry Paulson recently resorted to sounds very much like the old actuary dig that offers a ten foot rope to a man drowning eleven feet from shore. What changed aside from what we already know, wish we didn’t and hope we can recover from?

What we have here is a case of flotsam economics, tested at the highest level of finance. During a storm back in 1992, over 28 thousand rubber ducks and various other manufacturer-stamped rubber bathtub toys were released into the Pacific Ocean. The accident spawned a new science of tracking as the ducks (and frogs, turtles, and beavers) found their way to Maine (and points beyond) via a current that carried the flotsam thousands of miles, over the North Pole and into the North Atlantic.

This sort of flotsam science, now being practiced in Greenland has been adopted by our Treasury Secretary, who seems to be releasing ideas about how the financial system should be saved, dumping facts (he should have known about) into a system (he should have been closely monitoring) in the hopes of finding out how to fix (what should have never been broken).

Except, Mr. Paulson is using a $700 billion rubber ducky. What we know and what we need to know have left both Congressional leaders and the taxpayer in a sort of multi-billion dollar limbo. We know, as of several days ago, that the investments many of us had in the stock market as of November 13th, 1998 are right about where they were as of the close last Friday (dividends and stock splits included). The great scheme to get the average person to believe that stocks are not only where we should be if we want our money to grow but need to be if we want to retire according to our dreams, has, for want of a better word, failed.

The question is: can it be fixed? First, let’s start with the role the Central Bank plays in the events of the last decade. At no time in our recent financial history has an economy seen the growth of two bubbles and two collapses to near to each other. First the internet bubble, the one fostered by the overselling of a new technology and the second, fostered by the overselling of sub-prime loans to folks looking to engage in the American dream of homeownership.

Both were achieved with an incredibly accommodative Federal Reserve, one that lowered rates to 1% for too long and then, just as folks were settling into their homes, some of which were gained only because lending was loose, they began to raise those rates. An inflation-centric policy focused on stimulating the economy while trying to rein it in, added instability. To keep the flow of money in the system, the Fed ignored the real problem that faced banks – and still does. How do you continue to loan money if the cost of that money is too high and supply dries up?

Lending, contrary to what has been perceived, continues, at an almost record pace. Federal Reserve data points from the last three months has not shown banks to be the curmudgeon lenders we have heard them to be. Business and industrial loans are up 15% from a year earlier and home equity lines are continuing to be tapped. What has changed for these lenders is the access to new reserves of capital to continue to do what they are designed to do.

Previously, during periods of tight money, these loans were securitized, albeit in a sort of willy-nilly fashion, combining good with bad, homes with credit cards, and selling them to buyers, who were more than willing to take the risk. The Central Bank should have been able to run models that were tuned into this monster of their own creation. They should have been able to see, what many of us saw over a year ago, that expensive money does more than keep prices in check and jobs/paychecks at a certain sustainable level, it creates a slowdown accompanied by speculation of what might be next.

Had the Fed concentrated on how these lenders were vetting their borrowers, many of these loans would not have been made at the rates in which they were made. Ask yourself: even if you had the money, would you have lent it to companies like GM – under any terms? Probably not.

But banks saw an opportunity to not only lend cash to a company that was unable to pay it back but to raise money to lend to yet another poor prospect via the securitization of the previous debt. This has many of us extremely upset and has exposed the bailout to be something of a random effort.

We have, and rightly so, expected more strings attached to the investment we made in these institutions. Congress should have expected mandates but those strings would have simply added more string to an already tightly wound noose.

Paulson will disagree with this idea. The first $250 billion simply got the ball rolling. It was designed to let the banks know that the taxpayer was concerned but not angry, interested but not worried that these banks would eventually do the right thing. And, oddly enough, they are. They continue to lend even as they worry about previous loans. The difference between then and now: the banks are holding these loans on their books in part because there is no private capital willing to take the risk – even as the risk has almost been completely removed.

That rolling ball, however was launched up a steep incline and even the least among us realize that the physics of that action does not allow for it to go anywhere but back down to its original starting point. The bailout was ill fated even before it began. The financial system is an abstract; we are not.

Secondly, Paulson’s notion of holding onto the remaining $410 billion for emergencies seems to ignore the problem: this is an emergency. Waiting for clarity is akin to waiting for those rubber duckies to wash up where you might expect them to rather than where they ended up: Maine.

Two things need to be done, neither of which is very palatable. Let any businesses fail (or declare bankruptcy) if they are poorly run. Shareholders will pay dearly for this action but in hindsight. they should have stepped up and been much more active than they were.

And then rescue the workers – the consumers we have needed so much in the past to keep the growth of this nation on track. If that means extending unemployment benefits, increasing food stamp limits or even extending partial loan guarantees to the estimated 19 million homeowners who will owe more than their home is worth in 2010, so be it. I believe that Americans are much more willing to lend a hand to a fellow worker than they would to, as David Brooks of the New York Times calls them: the politically powerful crony capitalists.

If Paulson wants to do something right, guarantee the investments made by the private sector, the very investors he would now like to see step in and help our ailing financial entities. They will assume risk if the risk is worth taking.

For now though, both Paulson and Bernanke are offering the old idea of wait and see. The Treasury should stop throwing ducks overboard and hoping they will go where they should. The Central Bank should focus on long-term adjustments rather than short-term tweaks. While it seems as though they should get out of the way, the marketplace will not allow them.

The facts haven’t changed. We are still a long way from recovery. And like currents littered with rubber ducks, investors will follow the path of least resistance.