Fed and Treasury - Putting off Hard Choices with Easy Money (and Probable Chaos)

John P. Hussman, Ph.D., Hussman Funds

Brief remark - from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 4% of the purchase price - the remainder being "non-recourse" financing from the Fed, Treasury and FDIC. This essentially implies that the government would grant bidders a put option against 96% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats