Why is the U.S. Government considering setting up a fund to purchase mortgage related assets from financial institutions?
Fasten your seatbelt and put on your thinking cap. This idea is being circulated as a way to stimulate the current economic situation. Credit and commercial paper markets are currently "locked up" and money isn't moving. Banks and institutions are short of cash to loan, and also lack the trust to loan out money. This situation, the freezing of markets, is based on the accumulation of "bad debt" in the markets. And the bad debt is an extensive amount of overvalued "stuff" in the portfolios of banks and other institutions - home loans.So many "packages" or "bundles" of "securities" that are nothing more than an aggregate of housing (mortgage) loans that were made outside "good practices" are facing default. This means that income from the payments of those who were extended the mortgage loans will be stopping. The properties will be "given back" to the holders of the paper, the banks and institutions with the bundled securities. The properties may or may not be worth what is owed (and almost certainly are not because of the declining value of houses - which has been "artificially building" since the 1970's). Property, though it has some value, is not the same as "cash" assets.Because the properties are not "cash" and cannot be "moved" like "cash" can be, they are of no value in credit or commercial paper markets. This is particularly true when it comes to making loans or otherwise increasing "liquidity" of a group that needs the financial support of that loan to meet payroll or the like. A bunch of mortgages isn't going to be effective in helping a company make good on the wages of its employees. It can't finance the completion of construction of new facilities, or the purchase additional materials to manufacture new goods or products.Reread this and take it apart to understand it. Also, read additional similar questions posted on WikiAnswers.
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