The Theory behind the Rescue Plan

By Greg Mankiw's Blog

Here is the key passage from President Bush's speech last night:

as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

In other words, the premise appears to be that the market is irrationally pessimistic. That might be so. Nonetheless, one has to be at least a bit skeptical about the idea that government policymakers gambling with other people's money are better at judging the value of complex financial instruments than are private investors gambling with their own.

Related Posts :

1. Sorry, RTC History Suggests Stock Market Not At Bottom
2. $5 Trillion Cash Pool Needed to Stop Rout, Ohmae Says
3. Bottom Line on Paulson-Bernanke Bailout Plan

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

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