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Insuring MBSs vs. Buying Them


I’m not sure about the central planks of the alternative plan House Republicans have put forward:

* Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.

* Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.

Immediately, this strikes me as the kind of program that has the potential to become a permanent feature of the policy landscape as opposed to a temporary measure. These kinds of government insurance plans can be very hard to kill. Whatever its drawbacks, the Paulson plan — buy, hold, liquidate — would be easier to terminate.


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