Wednesday, October 1, 2008

As the Bush, Paulson, Bernanke and crew scramble to make another attempt at passing a bailout bill, one wonders why passing the risk and potential reward (unlikely, that) of these mortgage-based assets to the Government would solve the problem.

Yes, the U.S. Treasury has deeper pockets than private parties. But with a 350B$ price tag, or 700 B$, even the U.S. fisc will have indigestion. If the assets can only be liquated by the Treasury (or by as-yet-unnamed fiduciary) at a steep discount from the purchase prices, the shortfall will be monetized in deficits that will exact the cost from the economy. The burden of the bad assets will be only shifted from the current mortgage-based asset holders to other shoulders.

How the bailout might work to the benefit of all? First there is the considerable benefit of remaking a market for these assets again…. even if they must sell at a loss.

Next would be by avoiding (or quelling) a panic. The panic avoided would be the overreaction by the markets to the souring housing market and the mortgage-derivative securities.

But is it an overreaction? The Nakedcapitalist suggests otherwise.

At any rate, the lack of transparency makes the extent of the problem very difficult to gage