Yeah Mary....
I fail to see what the benefit of the insurance is. If you are insuring a burning building... how is that different from a bailout? ..... Except for the fact that it completely avoids the one key component of the asset purchase plan, actually establishing a price up-front for these assets that the market can latch on to. One of the key problems here isn't just that these morgage-backed securities (and all the other collateralized obligations) have lost vaue, but nobody knows HOW MUCH value they have lost. The market for these products isn't functioning. Lots of firms want to sell... very few firms want to buy, and you cannot establish a market clearing equilibrium with only one curve (the supply curve) we need to establish a demand curve. THe governmetn would step in and buy some of these assets. That immediately establishes a price. at that point firms can determine whether or not to sell at that price, and the market can begin to act like a market again.
the insurance scheme seems (to me) to be an attempt to pretend like you aren't actually bailing out firms by buying their questionable assets.. instead you are just "insuring" those questionable assets. <wink wink> If the assets prove to be valuable, then the government doesn't pay out onthe insurance (of course if the assets prove to be valuable... the governmetn sells the assets it purchased, perhaps for a profit). On the other hand if the assets prove to be worth less ... then the insurance is called and the governmetn pays out (in much the same way as the govt would be hosed if they had outright bought those assets)
Insurance is an ex-ante product. You provide insurance to a pool of insurees BEFORE the fact to smooth out uncertain future risk within the pool. Insuring a pool AFTER the risk is revealed is not insurance at all... it is a bailout.
|