As best I can gather, Wall Street is having conniptions because its "financial instruments" are worth less than investors thought.  And why are those complex mortgage-backed securities "toxic"?  Because they're based on mortgage payments that some home-owners can not afford to pay.  The pools of Wall Street capital are running low because millions of little streams of mortgage payments are running dry.  Paulson wants to dump buckets of money directly into the pools, because they are "too big to fail".

What I don't get is why the pools would run dry if the cash were dribbled into the individual streams, instead of being splashed into the pools.  In plain English, what if the Treasury offered "bail-outs" to homeowners rather than investment bankers?

The Wall Street whiz-kids and their investors are panicked because they figure they can't count on li'l old me to pay the mortgage I signed up for.  If they could count on me, they would not have to "write down" their fancy "instruments".  One way to give them that confidence would be a government guarantee.  Not to them.  To me.

Suppose the government offered me the chance to "participate" in a "home-owner bail-out".  Say, for example, that I signed up for a mortgage payment of $1000 per month, and I can no longer afford that much.  So I go to my buddy Hank at the Treasury and say, "Look, old buddy, old pal, I can only pay $800.  Howzabout you pay the other $200 for me so I can stay in my house?"

Savor that scene for a moment, and then ask yourself what kind of bargain Mr. Treasury Secretary Paulson could drive with me.  I am not "too big to fail".  He could say, "Sure, friend, I'll help you out.  But it's taxpayer money you're asking for, and the taxpayers have to get something in return.  Tell you what:  if they pick up 20% of your mortgage payment, they get 40% ownership of your house.  What's that -- your house is worth $50K less than your mortgage principal?  Well then, let's say 75% ownership."

Now, this is a much harder bargain than Paulson wants to offer Wall Street firms.  But remember:  I am not too big to fail.  And I do need a place to live.  So, compared to an investment banker, I'm a pushover.  I take the deal, the whiz kids get their slices and dices of my mortgage-payment stream;  I keep my house, they keep their Learjets;  their balance sheets are solvent, their assets are liquid, they have no excuse for panic.

What I want to know is this:  would it cost the Treasury more, or less, than $700 billion to "stabilize the markets" by bailing me out?  By "me" of course I mean "that fraction of American mortgagees who need a bail-out" -- a large number of people, to be sure, but not I take it remotely close to a majority.

The follow-up question is obvious:  if Americans (as taxpayers) cannot afford to help make the payments that Americans (as mortgagees) cannot afford to make, why the hell should we believe that Americans (as a nation) can afford to bail out Wall Street?

I, personally, am not "too big to fail".  I, the American people, certainly am.  I don't know how Wall Street can make do without me.  So why are the financial experts exclusively focused on Wall Street?  Easy:  financial experts, as they have already proved, are smart enough to outwit themselves.

--TP