Treasury to Dig Out Mortgage Assets in Attempt to Unclog Drain

What are we doing this delicate Sunday morning? We are waiting for the miracle to come; waiting for congress to act later this week on a $700 billion bailout of the financial system.

To put it simply, the sink is clogged, the water is overflowing, and stuff is getting wet and damaged. Rather than continually mopping up the overflow, the powers (Bern and Paulson) are making an attempt to unclog the sink. We say "attempt" because nobody is particularly sure if this cure is going to work, but all fingers are crossed in the right places.

There are some insufficiently astute people (placing theory over reality) who are taking the line that nothing should be done at all, especially at the expense of the taxpayer. Megan McCardle suggests that Fed head Bernanke tested that theory with Bear Stearns and it failed to show any result.

The purpose of this huge cash infusion will be to unclog the sink. Via US News/AP we get the disturbing details.

• treasury secretary broad authority to buy up to $700 billion in mortgage-related assets from any financial institution in the United States.

• Raise the $10.6 trillion statutory limit on the national debt to $11.3 trillion.

• Allow the treasury secretary to buy, hold and sell the assets in any way he sees fit. That includes the ability to go outside normal government contracting practices to hire private companies to manage them.

• Give the government power to designate financial institutions as "financial agents of the government" and require them to carry out any "reasonable duties" that entails.

• Require the government to report to congressional budget, tax-writing and financial services committees within three months of using the authority and every six months thereafter.

• Instruct the treasury secretary to consider both providing market stability and protecting taxpayers in using the bailout power.

• Expire two years after enactment.

The big questions are will this actually work, and will the U.S. Treasury be able to pull out a profit or at least minimize losses to taxpayers.  Exactly what assets the bank hold, and their quality remains a mystery to most of us and one would expect that taxpayers at least need a full accounting of what we are getting.

If this is about stabilizing house prices by making freeing up banks to loand, as suggested in this article:

Experts say that the government's enormous plan to relieve Wall Street banks of their bad investments has a decent chance of stabilizing home prices, at least in theory. If that happens, it will stop Wall Street's bleeding, but could still keep many families locked out of the housing market.

then we are thinking a bit too wishfully. Prices had moved up faster than income, or rationality, so there is no reason to expect prices to float above true value, nor should we hope for such.  The banks, burned once, are not likely to provide the liquidity and lax oversight that created the inflated prices in the first place.

The primary purpose of this bailout SHOULD be to stabilize the financial system by clarifying and recognizing losses as assets transfer to the Treasury, and with the expectation that the housing market has further to fall.