[A]s it stands the Dodd bill won't actually bail out the economy or the financial sector.Why? Well, first of all it's paying too much for mortgages. 15% off current prices is less than most properties are going to drop. I know folks don't want to hear that, but a return to trend is more than that. 30% would be a reasonable number, but the proper way to do it is to figure out what housing prices in an area would have been without a bubble and pay slightly less than that, though that's slightly punitive. But then, why not be slightly punitive? No reason why the government shouldn't make a bit of a profit on bailing out banks. They already booked their profits and gave them to their executives, after all.
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The way a housing bubble works is a reversal of the historical norm, along with an overshoot. That's what the US government should be paying - pay for a mortgage what it would have been worth if there'd never been a bubble, minus about 10%. That's a fair price when you're buying what amounts to distressed property and it means you are setting a real floor that allows for a bounce afterwards.
Sounds reasonable. Still, some banks will go belly up. Institutions that have already made realistic write-downs of their "toxic" derivatives won't want to play. Good. They don't have to and thus a lot of the "big guys" who want in to this "bailout" won't be able to get their hands on the money. Even better.
From personal experience, getting 10 cents on the dollar when you sell your worldly possessions is a good deal, when you need the cash immediately. This proposal is a better deal than 10 cents on the dollar.
