Fundamentally, that is the Bernanke/Paulson Bailout Plan -- take $700B, buy up non-liquid, depressed assets at above market price to inject capital into Wall Street at just the right places to keep the whole thing from seizing up.
And, if this were just a crisis of liquidity, this might not be such a bad plan -- use the power of the government to forcibly inject liquidity into the market, and then resell the assets we've collected later, reintroducing them into the market at a slower rate then they were pulled out. If we believe in the market, then the market can work itself out with a little bit of lubrication.
Depending on how much the assets end up being worth when we resell them, the taxpayers might not even be losing the entire $700B. It's even possible that we could make a profit, since the prices of these assets are currently depressed by the liquidity crisis.
But wait, there's more...
Unfortunately, we don't really know what the underlying value of these mortgage backed securities is. We know two things:
* No one wants to buy them, for fear that they won't be able to sell them later, or fear that they will have paid way too much.
* No one wants to sell them for less than they think they are worth.
Give or take, the buyers and sellers cannot agree on a price, and the Bernanke/Paulson bailout is going to have to be buying at pretty close to what the sellers want, and then either holding onto the securities for a bit, or turn around and sell at whatever buyers are willing to pay for it and take an immediate loss.
I would also posit that at some point we will learn the actual value of these mortgage backed securities -- people will either pay their mortgages or not, and the securities will begin coming due and paying out some percentage of their maximum value.
By keeping the economy moving and liquid, we allow capital investment in other sectors of the economy to continue, which helps avoid job loss, which reduces bankruptcy and foreclosure, and boosts the final value of these securities.
Once again, it's not an entirely insane plan. It's untested, but how could it be tested?
But then we get to oversight. Do you trust Paulson, a Bush appointee, to do the right thing and invest in the right spots to keep things going without just rewarding the people who created this mess?
I'm going to make another untestable claim -- to do this plan correctly, you will offend the moral sensibilities of anyone doing oversight. The guilty will not be punished, the victims will not get restitution, the system as a whole will be as broken as when we started and the only lesson learned will be that the government will bail out risky investments.
And further, if the plan is carried out poorly, rewarding the cronies and just postponing the day of reckoning, your outrage will be only slightly higher than if it were done well.
This Bernanke/Paulson plan will not work with oversight. Oversight would disrupt any good they are doing. Make no mistake, you'll know what they're doing, since publicly traded securities are public, but you will have no say in what they are doing.
All-in-all, it's not an insane plan. It might even work. It's got a better chance of working than anything else I have heard. But, it requires a leap of faith -- and I have little faith in a Bush appointee.