"You need the ultimate sheriff to come into town to cool things down, and that's a role only the government can play," said Eugene A. Ludwig, a former U.S. comptroller of the currency.
The bailout plan, laid out in a 2 1/2 -page document delivered to congressional leaders Saturday, would in effect allow the government to act as an investment bank, buying debt from troubled banks and other financial institutions stuck with securities tied to distressed mortgage loans.
Some believe that the securities to be purchased by the government are so undervalued now that they may eventually turn a profit.
UC Berkeley economist Thomas Davidoff said that, if executed properly, the plan could net a profit for the government, though he cautioned that this was a big if.
"The total value of these mortgages has fallen so much that the fall in value [of mortgage-backed securities] may be in excess of what can reasonably happen even in a really bad foreclosure situation," he said.
Treasury Secretary Henry M. Paulson and others pushed for the plan after months of turmoil stemming from the mortgage meltdown, which included the collapse of mortgage lenders like Countrywide Financial Corp. and investment banks like Lehman Bros. and Bear Stearns Cos. The crisis of confidence accelerated last week after a money market fund "broke the buck" -- allowed its share value to drop below $1 -- because of its exposure to Lehman Bros. That was significant because although these funds are not insured like bank deposits, they have been marketed to the public as rock-solid investments that would always keep their value.
Industry and government leaders feared that the loss of confidence would drive investors to withdraw money from the popular funds in quantities they could not meet.
Still, bringing the money funds under the umbrella of government bank regulation could create its own problems.
"If you extend insurance, you must extend control," said Lawrence E. Harris, professor of finance at USC's Marshall School of Business and a former chief economist for the Securities and Exchange Commission. "If they don't regulate them, there will be huge problems. But I'm not sure they have the resources in place to regulate them."
The housing market's path to recovery remains the chief imponderable in the financial crisis. Economists generally agree that a housing recovery is essential to an overall financial recovery, although there is a difference of opinion over how aggressively the government should intervene to prop up home prices.
