Fifty-one weeks ago Yves Smith ran a post about TARP 1.0 called “Why You Should Hate the Trea­sury Bailout Proposal.” She wrote (empha­sis mine):

The Trea­sury has been using the for­mula that it will buy assets at “fair market prices”….Yet as we dis­cussed, the plan makes no sense unless the Orwellian “fair market prices” means “above market prices”….[U]nlike the Res­o­lu­tion Trust Cor­po­ra­tion, which took on dodgy assets which had fallen into the FDIC’s lap due to the fail­ure of thrifts, and the Home Owners’ Loan Cor­po­ra­tion, which was estab­lished in 1934 after the hous­ing market had bot­tomed, this pro­gram is going to swing into action with the clear but not hon­estly dis­closed intent of buying assets at above market prices when future mar­kets and the ana­lysts with the best track records on fore­cast­ing this decline (you can add Robert Shiller, CR at Cal­cu­lated Risk, and Nouriel Roubini to the list) believe it has con­sid­er­ably fur­ther to fall. As we said ear­lier, this is a covert, not par­tic­u­larly well designed, inef­fi­cient, and unduly costly recap­i­tal­iza­tion of the bank­ing system.

Thanks to a new memoir by one of George W. Bush’s speech­writ­ers–an excerpt of which appears in the new issue of GQ–we now have con­fir­ma­tion that Yves* was exactly right. Here’s Matt Latimer describ­ing the prepa­ra­tions for the President’s tele­vised Sep­tem­ber 24 speech to the nation:

In yesterday’s Times, Joe Nocera gave voice to what I fear is going to be a common refrain in coming weeks. “It sure looks like the government’s first impres­sion about how to save the banks was the right one,” he says, before quot­ing Barney Frank to spec­ify, “It’s pretty clear that the bad assets are the problem.”

Nocera continues:

Every­where I’ve turned these last few weeks, I’ve heard vari­a­tions of the same refrain. “The orig­i­nal Paul­son plan had it right — they had to get the bad assets off the banks,” said Ronald J. Kruszewski, the chief exec­u­tive of the invest­ment firm of Stifel Nico­laus & Com­pany. “Before you are going to get intel­li­gent cap­i­tal­ists to invest their money in the banks, you have to get these land­mines off their bal­ance sheets,” said Brett Duval From­son, the man­ag­ing part­ner of the Margin of Safety Fund. “The reason things are frozen is that nobody knows if the banks are insol­vent or not — thanks to the bad assets on their books,” said Henry F. Owsley of the Gor­dian Group, an invest­ment bank that spe­cial­izes in “dis­tressed situations.”

The prob­lem here is not that Nocera or Frank or Kruszewski or anyone else are wrong to iden­tify the banks’ toxic assets as the root of the imme­di­ate and con­tin­u­ing bank­ing crisis. The prob­lem is the idea that the orig­i­nal pro­posal for TARP 1.0 was in any way equipped to deal respon­si­bly with the toxic assets—in other words, the assump­tion that “the orig­i­nal Paul­son plan had it right.”

Things on the eco­nomic front still look very bad out there, what with a stock market in free fall, Ice­land on the verge of bank­ruptcy, and, oh, did you hear that we’re pump­ing another $38 bil­lion into AIG? It’s all ugly, and it’s prob­a­bly going to get worse and stay bad for some time.

But there’s a few little tiny bits of good news that Yves Smith res­cued from the rubble yes­ter­day.

Where are we now?

+ Reports off the Hill say that a deal is done. $700B total, greater Con­gres­sional over­sight, restric­tions on exec­u­tive pay, no bank­ruptcy law changes, no money for afford­able hous­ing, the (use­less) House GOP insur­ance pro­posal stays in but only as an option, and, most impor­tantly, the gov­ern­ment gets equity war­rants in case the toxic assets really are as bad as every­one fears. Obama and McCain are both on board.

+ Paul Krug­man and Brad DeLong are now openly favor­ing Swedish-​style nation­al­iza­tion instead of the Paul­son plan–which, for the record, Yves Smith has been push­ing since the begin­ning–even though Krug­man, at least, rec­og­nizes that a nation­al­iza­tion plan is polit­i­cal poison until at least after the election.