UK Bailout vs. US Rescue Package - Part 1

A good friend of mine, is one of my secret voices when it comes to finance, and I get alot of insight from him. Nick Taleb (I am pissing him off by calling him Nick, but well, you think he is the only one who can take the piss?) when he wrote his book Fooled by Randomness, in which he ruminates on his view on Finance and the markets, he mentioned that his book was the fruit of lengthy conversations into the night with one Jamil Baz, a well known professor of financial mathematics, who is now at the University of Oxford. Well, many of my posts, notably the ones on finance (I am solely to blame for the technology posts ) are also the result of exhaustive (and often satirical) conversations with my friend, who, is also a financial mathematician....
I may not be a Nick Taleb, sure, and I may not be (yet) and advocate of Karl Popper, but well, I did go to the LSE, to which Karl Popper was a famed philosopher. (Maybe you heard of George Soros? One of his disciples). Well, I am a disciple of Ian Angell, and one of his original New Barbarians, so, there might be some similarities.

Anyway, I was debating with my friend the difference between the UK bailout of £500 Billion to the Fed's $700 Bn rescue package.

They are fundamentally different.

The US Rescue package, to which was first rejected by congress, sending the markets into more turmoil and ever more decline, isn't exactly about the banks per say, but rather, buying out the bad mortgages, which is the source of the problem for the crisis. The housing market in the USA is crashing, and its taking down the whole economy with it. Now, I did mention this in a previous post, but, well, the banks were too loose on giving out mortgages overvaluing the houses which subsequently dropped into a sub-prime value, even less than the initial price. So, the banks are the ones to carry the loss. That is the cancer, because, the more the subprime crisis deepens, the lower the house prices will fall, making it a very vicious cycle, because the more house prices fall, the more banks will incur losses. So, what is the Fed doing with the $700bn? They are going to buy all these bad mortgages. The government, can sustain buying these mortgages at a loss, because, well, when it does buyout all the mortgages, it stops the domino effect, and kills the cancer. i.e. because the government, technically , can't go into a "liquidity" crisis per say, and won't need to sell off any of its assets, to stay afloat. (This is not exactly true, but lets just assume- no need to get into political economics).
So, that means that the government can just sit on these bad mortgages until the market recovers, and the value of these assets goes back to normal. The smart (and counterintuitive) thing about this, is that this move in itself, is the cause to stop the market from crashing, and will eventually drive the value of the houses back up and the government can re-sell them.

Cause and effect. I love Adam Smith. The UK bailout, although, is a different thing.