Predatory bailout?

The defense of the Paulson Plan, as I understand it, is that the assets the government is planning to buy are going to appreciate in value and so this isn't just a trillion taxpayer dollars given away to the investor class, but is also a great opportunity. In other words, the idea is that the market has undervalued these assets and that whoever buys them will make a handsome profit down the road.

And that all sounds great, but you have to ask why the assets are undervalued. Krugman rejects the plan on the grounds that it only makes sense if you assume that the problem is a liquidity problem. I think his point is that Paulson seems to think that demand for mortgage derivatives has collapsed because of a lack of investment capital rather than because of a fundamental problem with housing stock.

And, of course, if that's what Paulson thinks then the Fed Chief is off his rocker, because there clearly is a fundamental problem with housing stock. There was a bubble. It collapsed.

My guess is that Paulson's assumption is a little bit different. He's merely assuming that the debt will be collectable. In short, the plan makes the government the collection agency of last resort. I can think of reasons why Norquist and Rove would approve, but the rest of us should question whether this is the best or only place where leverage could be applied.

And another thing: How much would it cost to make the paper good? $700 billion will pay a lot of bills. In 2006, the average mortgage payment was about $1600. To make the math easy, let's assume the figure is now $2000. On that assumption, the $700 billion could be used to make 350 million monthly mortgage payments. That works out to five mortgage payments per home-owning American household. As long as the plan is to throw money at the problem, why not pay everyone's mortgage through the final day of the Bush Administration?