One point that I don’t think is controversial but that I haven’t seen clearly stated in the MSM very much is that the whole question of evaluating toxic assets as it pertains to economic recovery has a somewhat circular quality to it. If nobody is willing to give banks anything for their mortgage-backed securities, then the banks will be in bad shape, then it will be impossible for people with sound businesses to expand, then the unemployment rate will keep going up and wages will keep going down, and then everyone will default on their mortgages and the securities will really be worthless. The whole discussion about “responsible” borrowers and “exotic” loans becomes irrelevant if people don’t have jobs. What looked responsible when you were earning income and what looks responsible when you’re not are totally different things.
By contrast, if enough people buy up mortgage-backed securities to get the banks back in business, then sound elements of the real economy can expand and the economy can recover. This creates a scenario in which even though we’re bound to lose a lot of paper wealth in housing, people should still generally have jobs and incomes and thus be able to make mortgage payments. Not everyone, of course, but most people. In which case, the default rates will go down and the securities will turn out to be somewhat valuable.
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