Brad DeLong has a FAQ up about Geithner’s plan to purchase toxic assets on the theory that the market has undervalued them, and will in time price them properly. Among the items:
Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?
A: Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.
This response reminded me of a conversation I had over a beer with a banking regulator back in August 2006 or thereabouts. He reported on a IM conversation he had had with a colleague whose expertise lay in the area which subsequently imploded. After jokingly asking “Time to buy gold, huh?”, there was a pregnant pause. Then came the response: “Buy ammunition”.
I ordered another beer.