If it weren't clear that this bailout is merely a capitulation to the demands of banks favored by the Treasury to absolve them of responsibility for bad decisions, this should clear it up. Text here Confirmed here
on his point that the government should directly purchase housing assets, that is not the problem. if a few banks go down and are bought that is not a problem right now. there currently is no crisis in foreclosures. the current crisis is the devaluing of these bonds, causing asset impairment in the entities holding these bonds, causing a liquidity crisis. and on the accounting issue, I don't know where he is going with that. these assets are constantly being valued by the market, so whether or not the holders of these assets mark them down or not, the market will eventually do it for them
Buying the assests of the house (paying the mortagages off) would probably raise the value of the bonds issues against those mortgages for sure. But the consumers living in them - what happens to them? So the gov't makes their mortgage payments in return for some equity in their home? If their home was overpriced....this is a guaranteed loss. Because when the home is sold - the gov't will have recovered far less equity - since it would have to pay interest payments as well. It makes more sense to buy the bonds at a reduced price. And then pass laws that make it more possible for those with the mortgages backed by these bonds to restructure their payments in a way that they can afford them...even if only making interest payments for a time-being. The smarted thing to do would be to buy all these bonds, and then cut interest rates - this would reduce the default rate and also drive the value of the bonds up - which the gov't could then sell at a profit. The point is that the bonds have become illuquid. Noone wants them, they are are a sunk asset. It's like buying shares of IBM at 100 and seeing it drop to 1. sure you could sell, but it won't give you much cash. So you might as well hold on to them. But banks need the cash, not to hold on to them...but the gov't can hold on to them. In you get that, plus equity in these banks, plus you get a chance to make a profit in the long run, restore confidence in the markets and get the capital enging running again, that's not a bad deal. Main street just needs some flexibility. Once the gov't owns these bonds, they can change the terms to some degree of the underlying mortgages. I think the bailout plan is fine. You have to do it. It's that or there will be a mass credit crunch and business will slow to a stand-still. There goes the economy for all of us if that happens.
