You are going with the assumption that Treasury would take over those banks, eventually. But I assume banks don't really want to be taken over, and that based on past performance and lack of changed rules, they can avert it: they can become profitable again on paper with another bubble to the extent of weathering even if Treasure re-sells ShitpileTM 1.0 without a profit. And then an even bigger cycle starts.
So, is "liquidity" the key to an indefinite extension of this pyramid game, or do you mean something else? *Lunatic*, n. One whose delusions are out of fashion.
The only way to buy Shitpile™ is on cash, a leveraged purchase is too risky on the downside and leveraged purchases are more vulnerable the longer you intend to hold the assets. So if you're Warren Buffet and you're swimming in cash, or you're Bernanke/Paulson and can manufacture cash, you can buy Shitpile™ and hold it to maturity.
Now, the policy question is, can you unlock the liquidity and then set a monetary and fiscal policy that doesn't allow a repeat of the bubble?
The alternative view is that the "preposterously" high default and low recovery rates implied by the Shitpile™ prices are actually "accurate", and then you have a solvency problem. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
My argument was that the two go hand in hand: to prevent the repeat of the bubble, or a new bubble based on other exotic financial instruments that weren't subject to the loss of confidence (hence ShitpileTM 2.0), these markets have to be closed, from which it follows that the ShitpileTM bought by Treasury should not be up for re-sale even in theory. I'm not sure even holding to maturity is compatible with that. *Lunatic*, n. One whose delusions are out of fashion.
