So, apparently the US government is going to authorize up to $700 billion taxpayer dollars to purchase distressed financial assets. I had an email today that said, to paraphrase, couldn't the government make money off these assets if they buy them for the right price?
My first thought was that this was theoretically possible, though my internal cynic found it unlikely in a pricing game run by elected officials between the taxpayer and powerful Wall Street interests that taxpayers would get the upper hand.
But then I realized there was no possible way this will end well for taxpayers. Because the government cannot exercise discretion in day to day financial decisions. It establishes rules and benchmarks and the typical bureaucrat is punished far worse for violating these processes and rules than he/she ever is for reaching a bad result. So the government will establish rules and benchmarks for what price at which they will buy assets (this will be all the more true given the great rush everyone seems to be in). And having set this in place, do you know what assets will be put to them? All the ones that the current holders think are worth less than the benchmark. This is the winners curse on steroids.
Update from Megan McArdle:
there's a gigantic asymmetrical information problem: the owners of
these securities know much more about them than the Fed. And there
isn't (obviously) a large liquid market for the Fed to check against.
So the Fed is likely to overpay, because there won't be a lot of
bidders in any one auction.
Megan, of course, reluctantly supports the bailout where I do not. But she has her eyes open about what she is buying into.