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Get the bazooka ready

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agnes1

(Corrects paragraph 9 to read “$1.25 trillion of mortgage bonds” instead of “$1.25 billion”.)

It has been almost a year since Hank Paulson asked Congress to give him a bazooka so he could show markets who’s boss. Instead, it was the markets that put the former Treasury Secretary in his place, and they still look very much in control.

That’s going to make an exit from one of the most distorted corners of the U.S. credit markets extremely difficult, if not impossible, when much of the government’s support built into mortgage-backed securities and agency debt is set to expire at the end of the year. Maybe that’s why no one is talking about it and bond investors are left to guess what the next step may be.

And it’s a cautionary tale for the Obama Administration about the perils of throwing buckets of money at a problem without a long-term plan as it considers what to do over the next few months.

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