Dean Baker has a very good take on many of the bailout schemes for the mortgage debacle^*.

His point is very basic, that, “the hedge fund crew is doing what all good capitalists do when things go badly: run to the government.”

What’s more, he argues, rather convincingly, that they don’t want the problem fixed, but rather that they want enough time to sell these assets to less sophisticated investors.

He gives the actions of Citibank with regards to Enron as an example. They tried to get the Fed and the Treasury to lean on the ratings agencies not to downgrade Ken Lay’s pyramid scheme.

There actually was an effort at a federal bailout of Enron. A former Treasury secretary, who had taken a top job at Citibank, called a Treasury staffer to see if he could stop the credit rating agencies from downgrading Enron’s debt. At the time Citibank held several hundred million dollars of Enron debt. While the staffer refused to intervene, if Citibank had gotten its wish, it would have had the opportunity to dump its Enron debt on less informed investors before the price collapsed.

These examples should frame the debate on a bailout. If the assets held by the hedge funds are sound, and it’s just an issue of stemming a momentary panic, then the Fed should step in as lender of last resort and try to stabilize the market. However, if the issue is just one of giving the hedge fund crew time to dump their bad debts, then the Fed has no business getting involved.

^*It’s not just subprime…It’s everything in housing, it’s just moving first in subprime.