I can't express how much this whole bail out thing troubles me. Having the government determine what the "correct" price should be in a "normal" market should make any American queasy, but unfortunately, the reaction is very muted. Most of the folks in congress who talk like they are against it are just posturing to get some of their favorite stuff funded or to have their names mentioned on the news.
A couple of thoughts. First, no matter what people say, there is a moral hazard being created if the government spends more than market rates to buy these assets. It's important that not just the folks who made the bad investment go broke'; it's also important that the people who loaned money to the people who made the bad investment also take a hit. If that's me who loaned them money, I should take a hit too. Consider this, if someone borrows a large amount of money and puts it all on red at a casino, keeps the profit if he wins and lets the government pay back the debt if he looses, are you telling me there's no moral hazard? That's pretty much what happened here.
Second, what's all this talk about chaos being so bad. Are you kidding me? Traders thrive on chaos. Markets thrive on chaos. Wall Street really isn't a casino. In a casino all the probabilities are known and almost nothing unusual will happen. In real life, things don't follow textbook probability distributions (especially not the normal distribution).A couple of thoughts. First, no matter what people say, there is a moral hazard being created if the government spends more than market rates to buy these assets. It's important that not just the folks who made the bad investment go broke'; it's also important that the people who loaned money to the people who made the bad investment also take a hit. If that's me who loaned them money, I should take a hit too. Consider this, if someone borrows a large amount of money and puts it all on red at a casino, keeps the profit if he wins and lets the government pay back the debt if he looses, are you telling me there's no moral hazard? That's pretty much what happened here.
Finally, if you really insist on propping up this market, you don't need to create this new government entity with super-constitutional powers. Just pass a law: anyone who buys an mortgage-backed-security in the next few weeks and holds it for at least 6 months pays zero capital gains on the profits. That will bring out the vulture capitalist who will really determine what the value of this stuff is.
