Has the U.S. government found a psychological loophole in bailouts? They know that voters would object if their tax money went directly to bankrupt institutions. We Americans don't want to reward failure, and we especially don't like it when we are forced to do so. But what if not a single taxpayer penny is actually spent on the bailout? What if the bailout seemed free?

Psychologically, free is a completely different price from a penny. "Zero is not just another price, it turns out," writes MIT behavioral economist Dan Ariely in his recent book Predictably Irrational. "Zero is an emotional hot button—a source of irrational excitement."

Ariely and his colleagues ran this experiment: They offered people a choice of either one Lindt chocolate truffle (retail value about thirty cents) or one Hershey's kiss (retail value about two cents). They discounted each by 50 percent and offered the truffles for fifteen cents and the kiss for a penny. Overwhelmingly, people chose the truffle.

But then they reduced both prices by another penny; the truffle now cost fourteen cents but the kiss was free! Now people chose the Hershey's kiss, even though the price difference was exactly the same.

Getting something for free makes you enjoy not just the item you got but also the feeling of getting a good deal. Free tastes better.

Free and freedom aren't the same thing. In this case they're almost opposites. When Connecticut was drafting its Fundamental Orders in 1639, which wold become the world's first written constitution, the eloquent Rev. Thomas Hooker summarized its purpose: "The foundation of authority is laid in the free consent of the people." He did not say: "The government can do what it wants, so long as it appears free to the people."

Yet it seems that is where we have gotten today. The hardest part of doing a bailout today is structuring it so it appears free. A bailout by the U.S. government doesn't get you taxpayer cash to spend with as you will. That would not seem "free" for the taxpayer. Instead, you get loan guarantees.

What is a loan guarantee and why is it free? Basically, it is like having the U.S. government co-sign your loans. If you do default, the U.S. government will have to pay. So it is not given to everybody, only to those entities with short-term cash-flow problems where the truly free market would charge them such high interest to compensate for the risk of default that it would cripple the entity to take on the loan. But with the U.S. government guaranteeing the loans, the free market interest rate plummets to essentially that of government bonds. Now the entity can remain in business at low-interest-rate terms, turn its fortunes around, and repay the debt. The U.S. government loses nothing! Not a single taxpayer dime is used! It's free!

A sharp-eyed person might point out that the entity could still default. That is technically true, but not likely. What would actually happen, if the company still can't get out of its mess, is it would just take on more loans, or roll over existing loans, also guaranteed by the U.S. government. The only practical downside is a kind of permanent loan. Still no taxpayer money! Still free!

Last week, U.S. Treasury secretary Henry M. Paulson, Jr. used exactly this logic to propose bailing out the two largest mortgage finance companies, quasi-governmental Fannie Mae and Freddie Mac. He requested Congress give him a blank check with zero restrictions. The New York Times summarized his rationale: "By giving him the authority to spend an unlimited amount of money, he said, the markets would accept that the government's commitment is solid, and that would increase confidence. In turn, that would significantly decrease the odds that the government would ultimately need to spend any money at all."

In other words, it is free!

To see the enormous psychological pull of free you need look no further than the hearing at which members of both parties accosted Paulson. Did they mainly argue about the constitutionality of engaging in bailouts? No. Did they mainly argue about the fact that the current financial situation is the result of too many government regulations? No. There are no more heroes like Connecticut's Hooker. Like skeptical but hopeful shoppers, our politicians argue only about the question: "Is it really free?"

Democratic senator Robert Menendez of New Jersey probably summarized everyone's feelings: "How is it that we can tell taxpayers that there is no way you are going to be put on the hook here?"

Is it really, truly free? Oh boy!

By that logic, we should replace Medicaid, welfare, the departments of Education, Labor, and Energy, and a slew of other governmental agencies, and just issue U.S. government guarantees to citizens in temporary financial difficulties. Really, what is the purpose of all these social redistribution governmental agencies but to help those who are in temporary need? So why not bail them out?

If it's good enough for Chrysler, Bear Stearns, Fannie, and Freddie, it should be good enough for Johnny, Janie, and Google too.

Let's just have the U.S. government guarantee all corporate loans, and all individual loans so long as the individuals and their children agree to have the loan roll over to the next generation upon death (it is critical that bad loans can continue to roll over, so that they can always be hidden in the future and never actually defaulted on).

Everyone will have low interest rates. Investment would boom.

And best of all, it would be free!

But we would not be.