Buying bad assets: Who is going to buy them from the government?

Photo: wallyg, Creative Commons, Flickr

One of the questions I have been asking myself lately is why isn’t the government considering loans to Wall Street firms?

No matter where the money comes from (taxpayers, future taxpayers who will inherit the debt), it should be paid back. There has been a lot of talk about how the government could make money selling the assets they buy from Wall Street firms in the future.

Ahem, who is going to buy assets that everyone has acknowledged are bad? That’s what I want to know. Back when the big dogs were going crazy over credit derivatives, no one acknowledged that they were investing in bad assets. Now, though, everyone sees that they are bad. And what are bad assets? They are actual liabilities. Smart investors, as a general rule, do not invest in liabilities. (It’s actually antithetical to even think of liabilities as investments, isn’t it?) So, really, this does amount to a straight up bailout at everyone’s expense.

So, why isn’t the government considering loans? Offer money for loans, as was done for AIG. If they really think that increased liquidity will solve the problem, and if they think that Wall Street firms just need to be able to move on, provide the capital as a loan. Then at least the money stands a better chance of being paid back. With interest.

My other issue is this idea that the market isn’t functioning properly. I’m not exactly a pure capitalist (I like sensible regulation on markets and believe in social programs that actually help), but I take umbrage at the assertion President Bush made the other night about how markets aren’t functioning properly.

Excuse me? In a free market system this is exactly what would be happening. Over-valued and over-leveraged investments that proved to be bad would, in fact, be crashing institutions heavily invested in them. The market appears to functioning just as it should in a free market regime.

But I’m not an economist. What do you think?

Disclosure: Not an economist. Not an investment professional. But I do invest through my retirement plan and I’m riding this one out.

Site disclaimer.