Maybe I'm thinking at the wrong level, but it seems like there's a fairly clear answer to the question Paul Krugman asked a few days ago about the Fed buying up Fannie/Freddie/soforth bonds, and it's not that Bernanke is stupid. Instead, I think it's his potentially very profitable answer to Keynes on market irrationality: when it comes to federally-guaranteed debt, the fed can stay rational longer than you can stay insolvent.

Bernanke (we can pretty much assume) knows these bonds are good because he's one of the people guaranteeing them, and he has a license to print money. So if they're trading at well below the value of other federally-guaranteed debt, he can buy them up, make some interest income, and then sell for a profit when other people come to their senses. If the bonds go south, the treasury makes good on the guarantee, the fed still makes a profit, and the treasury isn't out anything because the fed turns its annual surplus (after operating expenses for those nice buildings and all) back to the treasury. Whereas if the bonds were in private hands and went south the treasury would have to spend real money to make them good. The fed is spending T-bills, whose interest rate is pretty much zero, to buy stuff whose interest rate is not zero, and any sensible investor would jump at the chance to do that.

Although Bernanke, Paulson et al may just be floundering around, there's also an outisde chance that they may be playing a high-stakes (ahem) game of arbitrage with insider information. A lot of people have pointed out that the banks selling or pledging sh*tpile assets have a better idea of the current value of those assets than the fed or the treasury -- and hence can stick the government with the really toxic stuff -- but it's also the case that the fed and the treasury have a better idea than the banks about what they're going to do next, and have the ability to manipulate conditions -- such as foreclosure rules and restructuring terms -- to affect the value of the toxic stuff they hold. So any financial institution looking to unload crap on the feds runs the risk that the feds will turn it into non-crap and make a tidy profit that could have gone to the financial institution instead. And that could introduce a little discipline for ongoing attempts to fleece the taxpayer.

Or, yeah, they might just be making stuff up as they go along.

You can see from this article just how skewed the debate on health care is going to be. I don't know whether the reporter is transcribing FUD from an insurance industry source, or has just internalized it, but let's unpack the notion that there will be terrific opposition to taxing "excessive" insurance benefits paid by employers to people earning more than $100K a year.

Where to start? Well, $100K a year is twice the median household income in the US, so talking about the impact on the "middle class" is just a touch deceptive. (Except that you have to havethree or four times the median income these days to feel "middle class".)

Then there's the amount of the impact, which maxes out at half a percent of income for people getting the "average" benefits package. What a terrible price to pay for universal coverage and removing the deadweight of paying for coverage for the uninsured and for all our excess morbidity and mortality. People getting more-than-average benefits packages would pay more, but then they're getting more from their employers, so what's the complaint, other than that they're well-off and entitled and don't want to pay?

Oh, and about that average: the cut-off points for taxing benefits are from a study published in 2004. The average cost of plans cited is current. Anyone think that the price of insurance has gone up by only 20% total over the past 4 years?  In other words, the cutoff was well above the average in 2004 when it was published, and there's no question that any legislation passed next year would put its cutoff well above the average too. Heck, it might even -- gasp -- set cutoffs according to the average family and individual plans in each state, so that people in high-cost states would bear an extra burden. Unless, y'know, there's no one in the entire federal government who can do simple arithmetic.

Why is it so important for insurance companies to skew the debate on this? Because what they would like is universal coverage along the lines of Medicare Part D: everybody ponies up to pay whatever they set as the going price, and the federal government picks up the extra tab. Taxation of excess benefits, community rating, anything that puts pressure on to reduce costs, is anathema for private companies under the current multiple-payer system because the most obvious target is that big fat 20% in administrative costs. (Yeah, there are lots of other ways to reduce spending, but they typically can't be made profitable when you customers can jump to another carrier every year.)

If this is what the discussion looks like when things have barely gotten started, I can't wait for the real thing. My only hope is that the anti-reform people are going to overplay their hand early, but I'm not holding my breath.