Now, assuming that we decide that we can't afford to let all these financial institutions fail, and assuming we decide it's worth spending several hundred billion dollars on it right now - rather than argue the merit of those two points, let's take them as a given - assuming all of that... why would Congress even consider using that money to bail out the financial institutions directly?????
So, in effect, the government would be swapping T-bills (or the like) which are a known value for these mortgage backed securities of questionable pedigree, (which right now are not able to be sold for love or money) and then sitting on the latter until they can be sold. Or possibly until they expire, since I think the CDO basically runs out of life when all the underlying mortgages are paid off.
This is a better potential bet for the taxpayers, since if I give money to every homeowner, 100% of that money is basically gone from government coffers, not to return. If I buy the mortgage backed securities, to whatever extent the underlying mortgages don't fail, I retain value. And, in the latter scenario, I've also added some liquidty back into a banking system that won;t function without it. In the former, I haven't, since giving a bunch of homeowners cash does jack for setting a solid market value on mortgage-backed securities, even assuming the homeowners use the money to pay off mortgage debt.
As you yourself point out, there's a moral hazard issue, too - why do I want to reward people who signed for a mortgage they couldn't pay, again?
no subject
First, let's understand the terms: The plan would allow the Treasury to buy up mortgage-related assets from American based companies and foreign firms with a big exposure to these illiquid assets. The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit.
So, in effect, the government would be swapping T-bills (or the like) which are a known value for these mortgage backed securities of questionable pedigree, (which right now are not able to be sold for love or money) and then sitting on the latter until they can be sold. Or possibly until they expire, since I think the CDO basically runs out of life when all the underlying mortgages are paid off.
This is a better potential bet for the taxpayers, since if I give money to every homeowner, 100% of that money is basically gone from government coffers, not to return. If I buy the mortgage backed securities, to whatever extent the underlying mortgages don't fail, I retain value. And, in the latter scenario, I've also added some liquidty back into a banking system that won;t function without it. In the former, I haven't, since giving a bunch of homeowners cash does jack for setting a solid market value on mortgage-backed securities, even assuming the homeowners use the money to pay off mortgage debt.
As you yourself point out, there's a moral hazard issue, too - why do I want to reward people who signed for a mortgage they couldn't pay, again?