My gut is telling me this bailout won’t work even short term. I think the goal of the plan is not to actually have banks sell the securities to the govt, but.tjust set an artifical market price (that is higher than the current market price) for these securities by having the government overpay for them and inspiring the banks to loan to each other without worrying about the financial condition of the bank. The problem is the banks aren’t dumb, they know these are not real market prices, and will lend with that risk in mind.

It’s kind of like the government trying to “bailout” the market in beanie babies. A beanie baby that sold for 10.00 originally and went up to 100.00 before crashing down to a value that might be zero or might be more than zero. the beanie baby owner remembers 100.00, and wants 15.00. if the government starts paying 60.00 for beanie babies, that doesn’t make beanie babies worth 60.00. people may start trading again, but only so long as they have faith that the last sucker can dump his beanie baby on the govt.

But the genie is out of the bottle. there will be no real confidence in that market. On the consumer side, people now understand beanie babies and housing can go down and down hard. i remember having this argument with people in 04 and 05 and people looking at me like I was insane, that prices only go up, and I had some fundamental inability to understand reality.

If people have lost that confidence in housing, kind of like they lost confidence in beanie babies, housing is not going to spark growth, and the banks are still going to be wary of pretending that the other banks are solvent. I think Paulson was right, the only way to try to revive a beanie baby based market is to having a big bank of money, 700 billion for instance, so the participants don’t have to worry about not being able to dump their beanie babies right away and can begin to truly pretend they have value. Doing a watered down plan will only make the beanie baby market more worried that the end will be near sooner rather than later. Not that i favor the bailout, but the likelihood of it having any effect decreases dramatically when it is a less dramatic plan. I could of course be very wrong about all this, but it makes me think that some (relatively) cataclysmic economic event shall soon be upon us.