You all know the movie plot. The Evil Scientist has laced the town’s water supply with a poison. All will die unless The Antidote is added, and he holds the city to Ransom. All seems lost until the Hero rides to the rescue with The Antidote. The Hero puts the Evil Scientist behind bars, and all is well (until The Sequel anyway).

Are there any parallels here with Paulson’s currently terminated Wall Street bailout?

Well, score one for the Evil Scientist. Henry Paulson, the architect of the bailout Plan, was until 2006 the Chief Executive of Goldman Sachs, one of the Wall Street merchant banks that profited from subprime lending when it was in full swing, and, tellingly, also profited on the way down by correctly guessing that the bonds that financed the lending would tank (along with American house prices).

The Ransom was certainly there — US$700 billion is a pretty cool sum of money. And a lot of it would have gone to Paulson’s old firm, which stood to make money by disposing of its holdings of toxic bonds for more than their current book value, as Michael West explained in yesterday’s SMH.

But what about Paulson also being The Hero? Here he was, riding into the distressed town, with The Antidote in his saddle. But wait a minute … If he was The Hero, then he would have to have known about the Poison when he was The Evil Scientist … Cue plot twist.

Unfortunately, the real world is even stranger than fiction. In the subprime crisis, while there were certainly some who knew it was a scam from the outset, the majority conformed to what Charles Mackay so well described long ago as “Popular Delusion and the Madness of Crowds“. Paulson, like his many buddies in Wall Street who also paid themselves enormous “wages” (Paulson paid himself US$37 million in 2005 as CEO of Goldman Sachs), deluded himself into believing that subprime lending made economic sense.

So if he didn’t understand that it was in fact a disaster waiting to happen, why on earth should anyone think that he now knows what The Antidote to The Poison is?

Certainly, buying the bonds off financiers would have enabled them to replace their essentially worthless “assets” with real money — and they could then get back into the lending game. Without The Antidote, sooner rather than later they would be forced to record those bonds, not at “book” value, but at market value — and they could become technically insolvent and unable to lend. The world financial system could have come to a halt.

But how long would The Antidote have worked anyway? Even in the weekend that it was worked out, five major financiers failed — Wachovia in the USA, Bradford and Bingley in the UK, Fortis NV in Belgium, Hypo Real Estate in Germany, and even Iceland’s major bank Glitnir — leading to state takeovers costing well over US$50 billion. How long would a US$700 billion Antidote last in today’s climate?

Not long, because the root problem is not the banks’ holdings of toxic bonds, but the public’s holdings of unnecessary debt. A vast proportion of the US$41 trillion debt that America’s private sector (almost three times the size of the US economy) was used to finance gambling on shares and house prices in the biggest speculative bubble in global history. That debt, ultimately, is what is driving the US economy into depression. Unless that is attacked, then a Depression will follow, whether or not Wall Street is bailed out.

Tellingly, Paulson’s original plan made no provision to reduce mortgage debt. So Paulson wasn’t being a Hero for Main Street, though I expect he believed he was. He was instead attempting to save Wall Street from itself, as Greenspan did so many times when he was Fed Chairman. But each “save” only worked because it revived the frenzy of irresponsible lending that has defined Wall Street and American banking in general.

This time, nothing can save Wall Street. There is, after all, no-one to lend to below the subprimes, apart from those who are already in gaol. But I have the feeling that some time in the future, many of Wall Street’s current lenders will indeed find themselves doing business behind bars.