The way it was handled totally destroyed the illusion of a free market. It also essentially encouraged bad behavior in the future since it endorses the attitude of "Well, if we're big and important enough, the government will bail our asses out, so we can be as reckless as we want, since in the end, it won't matter". Also, not nearly enough was done to ensure it couldn't happen again.
I think a controlled crash, rather than a freefall would have been more appropriate. The US would have provided support for the failing firms to completely unwind and consolidate their positions relative to all other entities that were still functional, and then allowed the sickest elements to collapse in an orderly fashion, even if it meant guaranteeing a certain amount of fractional dollar return for each dollar that was due relative to its value. Yes, that would still mean the direct action of the government involving public monies, but extreme times call for extreme measures, as long as it can be guaranteed that lessons were learned and it will literally never happen again.
The reason I favor this outcome relative to the bailout that happened, in addition to the reasons I mention above and below, is that the bailout maintains the relative status quo, which was obviously degenerate and unhealthy. In this instance I would frame the economy as a forest. An uncontrolled forest fire (letting the situation play out naturally, so a true freefall) could destroy everything and spread in ways and have consequences that no one could foresee. Also, recovery would be extremely long and very uncertain. Way too dangerous. The controlled crash is essentially a controlled burn. Does damage occur? Yes. But the damage is generally known and foreseeable, and can generally be anticipated and controlled to a certain extent. Some of the forest is lost, but not only does the controlled burn remove the dead and unstable elements in the forest that were a risk for a fire anyway, but it creates space for new growth and opportunities that wouldn't have been present otherwise, and that is how a capitalist economy is supposed to work. The no longer viable burn away, and new growth takes its place, and the forest is all the healthier for it in the end. In the short term, a controlled collapse would be bad news, but, long term, it would have been better than preserving the sick, degenerate sturcture that created the situation in the first place and would actually be far better in the long term for the health for the economy.
What would also have been required is an "acid test" for firms that were "too big to fail", and it is applied to all companies that appeared to violate an established "too big to fail" limit. If they failed the test, they were broken up in order to diffuse risk. New rules regarding mergers would be approved that not only can a merger not create a monopoly, but a firm is not allowed to exceed the "too big to fail" limit. Any company that doesn't want to abide by the new rules would be required to divest itself of all assets in the US economy and no longer be allowed to participate in it (such as the situation with DeBeers diamond company where they are considered a monopoly and are prevented from being able to participate directly in the US economy). Further, any new investment or economic instruments that could have an outsize/inappropriate impact on the economy (as we saw with the sub-prime mortgages that were bundled and turned into investment instruments that no one understood but still invested in) would be evaluated and determined to either be an acceptable or unacceptable risk. If acceptable, the instrument would be subject to typical investment rules and controls. If it was deemed unacceptable, it would be banned under SEC rules until such a time that the risk was considered acceptable.
tl;dr - The bailout was a stupid idea, but so is freefall. My argument is for a happy medium, controlled collapse. It would have gotten rid of the cruft and allowed for new growth and a healthier economy in the long run. Also, the measures taken to prevent it in the future are too weak. We needed to make a strong "too big to fail" test and used it as part of M&A to ensure this never happens again. Also, all future investment instruments would be required to be evaluated to ensure they aren't a danger to the economy.
would have been completely hobbled. If it happened today China would still be devastated, but not as much as a hypothetical 2008 freefall. The world would be a much better place if the banks were allowed to crash. They'll crash someday though. They only held off the inevitable.
