Well there you have it - Right wing Republicans true to form haven't found a problem that cutting taxes on the wealthy is not an answer. But lets skip that for the moment and focus on the basic idea of their plan - Financial institutions should be "buying insurance"
Nice idea and it sounds oh so reasonable. Much much better than tax payers buying the toxic debt. One small problem - Who exactly is going to provide that insurance and just how they going to price it
If the private market was able to price the insurance then they would just as easily be able to purchase the assets. Since they are not doing the latter clearly they are not going to provide any kind of insurance. So we are back to it - yes the tax payer.
Lets assume that somehow or the other we were able to figure out the value of the securities and in turn the premium to charge for the insurance. This is where the real problem for the tax payers comes in. If the value of the securities declines beyond what was estimated the tax payers will bear the entire cost. If the value of the Securities rises the financial institution gets all of that gain. What does the tax payer get- a couple of years worth of insurance premiums! Heads they win tails we lose and only if coin stands on its side do the tax payers come out ahead. If the Paulson plan was the MOAB this one is the mother of all rip offs.
As an aside the very idea of apply an insurance solution to the market mess suggests that the Republicans don't understand the problem nor insurance. Insurance is based on probabilities and insuring a diversified portfolio of unconnected risks e.g. a house burning down in one town doesn't change the risk of a house in another town burning down i.e. those two risks are unconnected and suitable for insurance. However, with mortgages that is certainly not the case and it actually is the reason we have a problem. People assumed that we didn't have a national market for home prices i.e. prices in some part could down while going up in another part. That has proven to be false- while the magnitude of price decline has varied the direction has been the same throughout i.e. home prices tend to rise and fall together every where. Thus if prices were to fall in one town good chance they will be falling in another town as well i.e. the risks are in fact connected and to even consider an insurance concept in this context just doesn't make sense.