You write:

“If the mortgage-backed securities are undervalued and taxpayers are going to make money at the end of any bailout procedure, then it stands to reason that we should have more private investors buying MBSs.”

That’s true, of course. The problem is the markets are acting irrationally. Fear, panic, and uncertainty - a group of less delightful human emotions - have overridden the normal market principles, where everyone acts in their own enlightened self-interest.

It’s irrational of course; there’s potential profit to be made. Aye, there’s the rub.

The market isn’t working correctly. What should be the invisible hand at work, guided by everyone’s rational self-interest has given way to fear and panic. Thus, the government needs to step in.

Hopefully the bailout/recovery/whatever can alleviate the fears and let market forces start acting normal again. I think it’s the best plan because it directly confronts the problem at hand.

As I wrote before I’m just as opposed to government interference in markets as everyone else. Unfortunately, broad, abstract principles don’t always stand in the real world. Thus, when I say I oppose government bailouts what I really mean is I oppose bailouts 96% of the time. It’s not some grand betrayal to our inner-soul. It’s just recognizing realities of the current situation.

No Doubt the “Socialists” are going to insist on some form of terms that “help the little guy” aka - people that got loans they shouldn’t (and otherwise wouldn’t) have gotten if pressures (not repeating that whole discussion who, what, where)weren’t put on to get people in homes regardless of credit-worthiness…

So they want to bail-out these people, so they can stay in this homes, and land up in FORECLOSURE a few years down the road rather than now when they STILL won’t be able to afford the home.

So, yet again instead of letting the bubble burst, we are putting patches on the bubble and putting off its complete/final rupture somewhere down the road.

how comes the securities built based on these shacky/liar’s mortgages got AAA rating ?
were the guys analyzing them stupid ?
were the guys dishonest ?
the main problem here is the TRUST. the majority of people value the securities based on their ratings and AAA is the highest. and if trust is gone the free market is gone.

Pejman Yousefzadeh,

Most of the time you are extremely knowledgeable, and your pieces always well written and contain useful insight. I recognize that you are a nationally known blogger, and a member in good standing with the conservative community and I am neither. This time, however, you are not only wrong, but dead wrong.

Markets do suffer from hysteria from time to time. They are not always rational, and do not always price securities at the appropriate values. At this time, the credit markets are simply not functional due to a hysteria concerning MBS’s and CDS’s (Mortgage Backed Securities and Credit Default Swaps). When major corporations such as McDonald’s and Caterpillar are having a difficult time getting loans as has been widely reported (OK, for McDonald’s it is primarily franchisees), something is clearly not right. This problem MUST be fixed by the opening of the market MONDAY, or this market, retirement funds, University endowments, and your ability to get a loan will go into the toilet. I don’t care how good your credit rating is … there won’t be money for the loan. Theoretically, there probably are better mechanisms to deal with the issue. But any mechanism must be large and immune to market psychology for the turbulent weeks and months to come. Today, the most workable option is to give Ben Bernake and Hank Paulson most of the tools they requested, and yes, sufficient funds, to tackle the problem(s) using their approach. There will be plenty of time later to discuss the best and most pure way of handling this mess. Pure conservative ideology is not the right approach this time, and I think Jim DeMint made a complete idiot of himself on TV yesterday. Democracy usually doesn’t follow the best course of action; the issue at hand is whether the plan is good enough. And yes, I think it is.

Mark Olsen

I had an idea during the speech last night. I’d like those of you who really understand this stuff to tell me why it wouldn’t be better than the proposed bailout.

If the root of this problem is that the MBS’s are undervalued because there’s so much risk of default, why doesn’t the government consider reducing that risk, rather than simply transferring it to the taxpayers?

Specifically, what would be the drawbacks of having the federal government offer loans to homeowners with at-risk mortgages to prevent them from being foreclosed?

I think it could work like this: The gov’t would pass a law making a fraudulent mortgage application a felony, punishable by at least several years of prison time. You default, the gov’t looks at your records and if they determine you lied about ability to pay, or signed paperwork overstating the value of the home so you could avoid the down payment, you go to prison. If they determine the bank had something to do with the fraud, their loan officers may go to prison too.

If, instead of defaulting, you apply for the new program, the gov’t loans you enough money to pay down the loan (minus an amount kicked in by the mortgage lender so they can avoid going to prison too) and refinance at payments you can afford.

The loan then gets repaid with a surcharge on your taxes, for which default becomes tax evasion and lands you in prison.

Most people would probably prefer to avoid this, and would work hard to keep up their payments. Those who can’t would have an alternative to defaulting, and a huge incentive to use it - to avoid prison time. This would reduce the default percentage dramatically, leaving the MBS’s valued at much closer to face value again.

Wouldn’t this be likely to cost a lot less than 700 billion, with a lot less interference to the free market?

This is a video you should see if you want to understand what caused this crisis…

Burning Down The House: What Caused Our Economic Crisis?

http://www.youtube.com/watch?v=H5tZc8oH–o