In response to the subprime mortgage crisis, President Bush has called for an $700 billion bailout: buying toxic debt from the firms that now hold it. That’s about $2000 for every American citizen, being used to buy assets that may end up being worth far less than the price the government is paying.
The whole thing is disturbing for a number of reasons. There is the constant moral hazard problem that emerges when government bails out people who behave in risky ways and lose. Then there is the degree to which this will further worsen the overall economic position of the American government: already badly strained by costs associated with wars in Afghanistan and Iraq, as well as tax cuts that were never matched with reductions in spending.
If there is any justice in the world, the bonuses paid to the current and former executives who ran the financial firms at the centre of all this will be clawed back in one way or another. This whole thing started because of financial instruments that let the top tranches of the riskiest loans be sold as low-risk assets; of course, the inevitable downside of bundling the safest portions of those loans was causing the riskiest portions to accumulate elsewhere. It remains to be seen what the full and final effects of all that uber-toxic debt will be.