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Originally Posted by Arne
Okay, government does not have the money to hand out a loan. They'll do what they usually do - ask the Federal Reserve to print the money, thereby they'll debase the currency. People will have to pay additional purchasing power to the government through the inflation tax. This is especially good for politicians, because most people don't know why there dollars won't buy them anything anymore so they just cut back on their consumption or go deeper into debt, but most of the people won't realize what's happened.
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no, the fed has not done that, they have so far used reserves rather than just "print the money". that was the point I made in the other thread that the money supply was not increased to provide the loan to aig.
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IF there's gonna be money coming back, I'd bet government will treat it as additional income and invent another Departement to spend it on.
Now Bernanke already said that it would be good for the government to buy all those MBS at above market prices. So the profits will go to all the people who foolishly invested in mortgage backed securities and it will be taken from the whole population especially those who can't increase their income in an inflationary scenario - for example the elderly.
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the problem is that there is NO "market price" for these securities as there isn't a functioning marketplace. there's a huge gulf between what the buyers believe they will pay and what the sellers believe they are worth...and that is what the proposal is intended to accomplish, providing the government as the buyer and creating the marketplace for these securities to trade.
bernanke's unfortunate comment was not as you've characterized it, imo what he was saying is that it would be best for the government to pay a fair price for the securities and not the heavily discounted prices that bottom feeders are willing to pay today.
if we are to have a functioning financial system going forward the firms need to liquidate these securities but they can't sell them for 20 cents on the dollar and still have the capital base to invest in the future.
if you actually believe that the sellers of these securities are going to "profit", well you have not been paying attention to how much writedowns have already occured.
the crux of the problem today is that this malaise has seeped into what were "safe" places to place one's money...when money market accounts "broke the buck" it was the last straw. it is people like the elderly who are in harm's way now, they are the ones who have their $ in these type of accounts that should have been immune, but clearly they were not.