While plans for saving the financial system are being formed, modified and dissolved by the day, the common thread through every plan seems to be to assist financial firms holding depreciated assets, most of which are mortgage-related assets. The cost is now unofficially estimated at $2 trillion or more. In contrast, aid to distressed borrowers is a second priority, with costs estimated at $50-100 billion.
There are two things about this approach that scare me. The first is that the cost of assisting financial firms in trouble is completely open-ended. The ultimate cost will depend on future declines in the value of their assets. If home prices continue to decline, and at this point there is no end in sight, asset values will continue to decline and $2 trillion may not be enough.