Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.
The plan is to set up an auction, in which investors use large chunks of government money to bid up the price of mortgage-backed securities. I'm no expert, but two problems seem readily apparent. First, while I can see why an auction is great for under-capitalized banks, it seems a pretty bad way to "protect the government from overpaying for these assets." After all, these are the same people who overvalued these assets in the first place.
Second, I'm wary of the idea that we can ever return to the market conditions that set the original value for these assets--which is the critical assumption underlying the plan. That moment, which came to a crashing halt last fall, was predicated on a delicate spiderweb of flush banks, complex investment vehicles and greedy and/or gullible counterparties. None of those exist today. We can't go back to that just by temporarily raising the value of mortgage-backed securities, and we shouldn't want to even if we could.