But I disagree with the theory that we would need to overpay for the securities in order to get the financial system working again. Here's why.
As I understand it, we are not "replacing" the capital needed to keep the financial system going. The problem is not the existence or non existence of cash. There is plenty sloshing around. The problem is that no one wants to lend to anyone because of the uncertanty over how much bad debt is out there. Because the probablity of payoff of these securities, and at what level, is unknown, they cannot serves as the security for finacial transactions. Worse, because those borrowing money have an unknown and unknowable liability, no one want to lend them money, as who knows if they will be able to pay it back.
The point of the U.S. buying the securities is therefore not to recapitalize the system, but to allow holders of mortgage backed securities (MBS) to ditch the drag on their books without a total write down. This can be done by buying for some fraction on the dollar of the face value of the securities, because it is actually valuable for the firms to have a defined loss and move on than to have an undefined loss that hangs over them indefinitely. This is why I proposed something like this to deal with the subprime loan meltdown over a year ago -- before it infected the rest of the market.
[Someday, someone will explain to me why people who can blab at conventions endlessly about "the butterfly effect" and "chaos theory" and blah blah blah seem utterly unable to appreciate the horrible complexity of today's financial markets and keep reducing this down to the willing buyer and the willing seller? It's like not acknowledging the externalities of pollution. Oh wait . . . . ]
What I object to is handing over unlimited and unreviewable power to an Administration with this track record. I think the U.S. will actually make money, in the long run, by assuming control over the securities. But the cost of administering this project is going to be hellishly huge (if done right) and the re-privatizaion of the securuites needs to be handled in an appropriate fashion. If history the past is prologue, this administration will not only outsource the management of this to inefficient contractors who line their own pockets while foreclosing on widows and orphans, they will sell off the securities at a loss to the financial industry once the crisis is solved in exchange for some hookers and blow.