The news out of this morning's economic hearings is that Bernanke ditched his prepared remarks to argue that "the Treasury plan should have taxpayers buy the assets and hold them at close to their maturity value." In this, he's making a very simple point: As designed, the bailout only works if the government vastly overpays for the damaged assets. "Maturity value" is not a number. It is a hope. The hope is that the market is currently undervaluing these assets, and that over time, their prices will rise. Those future, higher prices are what Bernanke means by "maturity value." Thus, if the Treasury can accurately predict "maturity value" -- something the market has thus far been unable to do -- then it can overpay for the assets now but not lose money when it sells them later, as in the interim, their worth will have floated upward to match or exceed what the government paid. It's actually quite a tremendous claim: I'm more confident in government action than many observers, but even I don't think that the government is better at pricing assets than the market. But that's basically Bernanke's assertion: The market price should be tossed out and the government should try and predict the future price that the market will settle on. Otherwise, he says, the government will be buying these assets at "firesale" prices. And that's a bad thing. Why? “We cannot impose punitive measures on institutions that choose to sell assets.” In other words, Wall Street should not be punished.
