Building on a bad idea to create a monumentally bad idea

The government's current plan for "saving" the banks got me thinking. See, the current plan goes something like this: instead of dumping more money into the black hole of insolvency that is most of the large banks who took enormous risks chasing leveraged returns during the housing bubble, we'll get private investors to do so with their money. How exactly do we do that? By essentially providing insurance that when they sell the worthless assets, they will be worth as much as the banks sold them to the private investors for.

"But wait a second," you might ask, "how is this different from the government just buying those worthless assets at face value, or just giving money to the banks directly and cutting out the middle man?" It is a good question: the end-result would be the same, the colossal waste of public money would be the same, and the effect on the economy (hint: all bad) would be the same. However, like the giant derivatives debacle which helped create the current mess, it's all a matter of accounting.

See, to buy up all the assets at face value (or just give the banks as much money as they wanted for free, which is functionally the same thing), the government would have to create and allocate that amount of money, which would be easily in the Trillions. However, by just providing guarantees, the government can fudge the numbers, and claim the realized losses to the taxpayers at this moment are negligible (since used toilet paper could be worth trillions, there's just no market currently). Treasury can guarantee as many assets as it wants without Congress allocating any money: it's only when people sell them that they need to pay, and payment is assured by the full faith and credit of the US government. It's like an enormous insurance policy written by a bankrupt insurance company, except this bankrupt insurance company is trying to lose as much money as possible, and it prints the money itself. It's really quite stunning in its simplicity.

Of course, why stop there? Treasury could help out everyone who bought a house by just guaranteeing the future sales value of the property: that's only a $12ish Trillion dollar obligation, but doesn't cost anything up-front, or require Congress to approve the expenditure. Sure, Treasury rates might go up as other countries refuse to finance the truly ridiculous spending gymnastics, but we have that covered too: the Fed can step in a buy Treasuries to keep rates low (with money they, too, print arbitrarily).

Good times... the only thing which could possibly derail the party would be a total economic and currency collapse, and nobody thinks that's really possible, right? I mean, there's no historical precedent for the collapse of an empire as large as the US built on a fiat currency and out-of-control spending, so nobody can predict what will happen, right? I'm sure we'll be fine; everyone else seems to be.