AFAICS, The US Treasury proposing to buy $.7T in overpriced mortgages (on top of the $5T from Fannie/Freddie) is no different than if the Dutch government proposed to use public debt to buy debt on $1M tulip bulbs during the collapse of the Dutch tulip bubble.

The purchase of overvalued assets is a game of "who is the greater fool" and right now Wall Street is pulling strings in Washington to make sure that fool is the public.

They'll try to justify it by saying it will avoid more serious problems but the truth is that the resources have already been misallocated and misallocating even more resources will only make the problem worse and shift the cost from those who choose to take risks to those who did not. We'll soon learn just how foolish the American public is.

Frankly, I'm amazed there aren't (yet) riots in the streets. These public purchases of overpriced assets are a transference of wealth from the poor and middle class to the wealthy on the grandest of scales. Apparently "liquidity" means the ability of the wealthy to unload their bad investments on the public.

The most absurd result of all this is the blame being placed on the "free market" when it is exactly the lack of a free market in currency (via handing a monopoly on currency that caused credit bubble.