PolySciFi Blog

Saturday, September 27, 2008


Throwing good money after good

(Polyscifi - all bailout all the time!) Another bail plan I think is much better is this one by Arnold Kling (it's a little way down there):

The right policy response to a surge in demand for this "money" would seem
to be to exchange "money" for bonds, which in this case means issuing Treasuries
and buying private securities. If that's the right policy, then I would have the
government invest in bond mutual funds rather than mortgage securities. First,
that would give you diversification, instead of putting all your chips on house
prices. Second, it would allow you to undo the trade easily if market psychology
changes in favor of corporate bonds. Third, there would be nothing magic about
$700 billion. Maybe it takes a lot less to nudge corporate bond rates

In short, if the problem is rising prices in the bond market for otherwise good companies / organizations, then we can lower the price by buying bonds. From my perspective, this has two major advantages over the current plans (though I can think of others):
  1. You directly address the potential main street contagion problem (in theory, the argument is "We would let Wall Street burn, but doing so would hurt Main street).
  2. You're not buying a pig-in-the-poke (what exactly are the distressed properties worth? Who knows, but some pretty bad adverse selection issues seem likely)


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