Reply #13: I'll Give It A Shot

[Beetwasher]

Something needs to be done sooner rather than later. Right now the government doesn't have the resources to immediately take over and manage all of the assets. There's a lot of them. It would take time we don't have to create the bureauacracy and "hire the smart people" to do this. Time is of the essence.

Additionally, having the private sector involved mitigates the risk. Granted, the gov't is taking on most of it, but any mitigation is better than none.

Also there are some fundamental misunderstandings on this board about what exactly is happening under Geithner's plan. Read the plan. There is substantial FDIC oversight of the auction. FDIC is going to determine exactly WHICH securities will be auctioned and they are going to analyize and EVALUATE the securities that are going to be auctioned beforehand. After they have evaluated them, then they will determine how much they are willing to loan based upon that evaluation and a debt-equity ratio. With competent and honest oversight, this should prevent any hyper-inflated prices being paid for the securities. FDIC is running the show.

Now, there is much room for criticism of this plan. Valid criticisms include no confidence in oversight ability of FDIC, the amount the gov't is subsidizing via loans vs. private portion, and fears that the MBS will continue to deteroriate. But those are issues regardless of whether or not private entities are involved or if the gov't just takes over the whole thing.

Additionally what your not taking into account is the effect of confidence being injected into the system and the stabilization of the system that can stabilize the prices of the MBS. This in turn adds more confidence and attracts more buyers etc. It's a positive feedback loop.

Also, this plan is one piece of a bigger picture and is meant as one step, a first step (for Obama's admin at least) at stabilization. If you add this piece to the bigger picture that includes stimulus, job creation, mortgage assistance programs etc., the whole thing injects additional confidence into the whole economy and they all work together and feed on eachother to stabilize and turn this thing around. If it turns around, the gov't stands to actually make money on this deal by getting the loans back with interest.

Finally, before you fix the houses foundation, you have to make sure it doesn't collapse around you. This plan is meant to stop the collapse. I have no doubt once the system stabilizes we will then move on to fixing the fundamental, systemic problems in the system which absolutely need to be addressed.