ANALYZING THE HENRY PAULSON OFFER...

The media refers to Secretary Paulson's$ 700 billion request as a "bail out," but it is no such thing. Not at all. Here's what Secretary Paulson's proposal REALYS is:

It is an OFFER. An offer to buy. An offer to buy distressed assets at a rock bottom price.

Under Secretary Paulson's proposal, the Treasury will have available to it UP TO $ 700 billion with which to buy distressed mortgages and mortgage-related assets at a price of its, the Treasury's, choosing.

Current holders of those assets, which have no present marketatall, will offer to sell them to the Treasury at a price. The Treasury can decide to buy at that price, or to offer less instead. The principlewill be "The Treasury buys at the lowest price it can." By doing this, the Treasury revives the market for thesesorts of assets in two ways:

1.The Treasury becomes a buyer for assets for whioch right now there is NO buyer.

2.As the ONLY buyer, the Treasury establishes a bottom price for these assets. A bottom price is at least A price. Better A price than NO price.

The Treasury as Only Buyer, establishing a bottom price for these assets, establishes a baseline from which the price for these assets can rise. Therewill be at leastsome investors who will be ready to offer a buy price higher than the price at which the Treasury as sole buyer bought. These new buyers will allow the Treasury, as seller, to recoup taxpayers' money. They'll also allow some institutions who dared not sell to the Treasury at a rock bottom price to sell to these new investors at a slightly better price.

Once the Treasury's buying establishes a markjet price for these distressed mortgage assets, risk managers at other investor firms can finally put numbers on their appraisals of the woirth of assets which now have NO value that can be estimated.

So far, so good. This is an excellent plan, one that will indeed re-boot the mortgage markets.

Less good is the call by some to put a cap on what can beearned by investment firms seeking to sell distressed assets to the Treasury. These investment executives are NOT -- repeat, NOT -- federal employees simply by reason of theirselling assets to the Treasury. Limiting their salaries to $ 400,000 or less will either cause these executives to leave -- ande to NOT be replaced by anyone with sufficient marketplace experience to make informed risk decisions -- or else the institutions facing salary limits will simply not offer to sell distressed assets to the Treasury. That would defeat the entire purpose of the Treasury proposal !

Not to mention that is a very, VERY bad idea for a government in a capitalist economy to be telling people what they can or cannot earn. That's for the market to decide. Wage and price controls have been tried before, and they are almost always self-defeating.

Nor should the Treasury proposal be an occasion for legislating at agenda of regulatory reform. That can come later, if needed. Right now what is needed is for the market to operate again. Treasury Paulson's proposal should almost certainly be approved AS IS, with all the customary disclosure systems, but with no further regulatory anvils attached....