It is an essential element of the Keynesian insight, that markets are not always self correcting, and need government priming of the pump.
Bush was absurd last night, when he said that this should not result in "regulations that will stifle growth" Duh, that's what regulations do, put a break on unfettered profit motive.
So, while infusion of cash is needed, as currently structured it will signal an increase in federal involvement not only in the financial market, but the housing market.
We/Government will be the owner of large numbers of homes of every kind. And in the short term we will be landlords, and have a say in the shape of the communities where they are located.
Nothing is more political than decisions of this kind. There is a tension between economic stability and fostering of diversity. This is not a popular statement in Democratic circles, but it happens to be shown in numerous cases. This was, as a matter of fact, government policy up to the 1950s.
In order to get mortgage insurance, either at the federal or state level sometimes segregation was a requirement. A vast apartment development of many thousands of units, Stuyvesant Town in East Side New York, was required to be a racially segregated whites only development. Separate but equal was the norm, as an almost as large development was built in Harlem for blacks only.
Actual sociological reality is not a pretty thing, and does not support an idealized world of post racial comity. We may yet get there, but we haven't so far. This is why leaving these decisions largely in the private sector was actually protective of our political culture.
Neighborhoods were thus formed by personal wealth rather than political ideology. And with the end of race or ethic restrictions, income and professional attainment were the entry qualifications, something no one was excluded from.
This argues for us not purchasing the securitized aggregations of mortgages, but rather investing in the companies itself, as done by Warren Buffet for Goldman Sachs.
And even Ben Bernanke, in the Senate Hearing yesterday said that this is a "reasonable approach, worthy of being presented to the White House." Henry Blodgetwrote about in his blog yesterday:
On the latter, note that Warren Buffett didn't buy trash assets from Goldman at a huge premium to market value. On the contrary, he let Goldman keep its assets and invested in a senior preferred stock paying a 10% dividend, with a huge warrant kicker on the back end. The government should drive a similarly hard bargain.
We have not fully thought about the consequences of the U.S. being the mortgagor for tens of thousands of houses and having to decide whether to foreclose to the advantage of the broad based taxpayers, or allow extended delinquencies for the benefit of the existing occupant. Each decision thus becomes a political issue, something that is neither good for the country or the party.
This method of infusing money into lending entities should have been seriously considered earlier in the process. But it is a way of ending the credit stoppage without the political difficulties that the current plan entails.
This is only one unintended consequence of this bailout as structured. Who knows how many others there are.