HENRY PAULSON, the Treasury secretary, has opened the government checkbook and is poised to spend $700 billion to end the financial crisis. What comes next depends on the precise mission and operating powers he and Congress assign the new Treasury agency that will oversee the bailout. We see four broad possibilities.
First, the agency could act as a deep-pocketed private investor that sees a bargain buying opportunity -- Warren Buffett on steroids. This strategy makes sense if one believes that the crisis has caused the prices of mortgage-backed securities to fall far below their fundamental worth, and that pushing them back up to their real value will be enough to restore the health of the financial sector. Under this "fire sale" view, government involvement is needed because no private actor has enough money to be the market-maker of last resort.
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