On The Bailout: That MBS Insurance plan…

misses the point:

He proposed that the government (presumably through the entity envisioned by the Paulson plan) offer to sell insurance to financial institutions that hold mortgage-backed securities (hereinafter MBS). Premiums would be determined by the rates of foreclosure on each class of securities so far. Under this plan, the government would be taking in money, not paying it out.

What’s the point? The crises is that the ability of banks to make new loans is being dramatically limited mostly because they can’t sell the MBSs (they cannot be valued with any reasonable accuracy and there fore there is little in the way of a Market for them) that they do have.

They have a lack of cash they can do stuff with.

Having them buy MBS Insurance will drain more cash and doesn’t really create a market. You can’t insure a risk you cannot measure.

This is a bad idea.

So is the Paulson/Treasury/$700B plan.

More to come.

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