This is more than a capitol crisis, it is a trust crisis. There is of course, as bailout opponents insist, a lot of private equity that can be brought to bear and help ease this problem. But you can free up all sorts of barriers to capital investment, like cutting corporate tax rates, capital gains, and suspending mark to market accounting, as well as have the fed drop interest rates more, but none of that will necessarily lead to more capital investment by people who have the money to invest.
There is so much uncertainty about how deep the various financial institution’s problems are that no one is going to sink private capital into them right now, no matter how tempting these policies may make it. Even institutions that didn’t get deep into mortgage backed securities and subprime lending have ties to the other financial institutions which is making them less stable and secure. Without an assurance from the government, even with massive incentives to pump in more private capital, no one is going to act.
Troubled institutions won’t have the incentive they need to unravel all the bad debt and reveal the real extent of the problem until they get a safety net. And if you can’t get inside to pinpoint the location and extent of the infection it will only continue to fester. $700 billion isn’t needed to bail out bad investment, nobody knows how much is needed. What it does is help restore an environment of trust, so that some sunlight can be cast on the problem, without which no solution can work.