Let's ponder the achievements so far of the government's "Troubled Asset Relief Program."

In little more than three weeks, we are now on Plan II. Treasury Secretary Henry Paulson's $700 billion emergency initiative to thaw frozen credit markets through government purchases of hundreds of billions in illiquid mortgage-backed securities this week morphed instead into direct investments in financial companies.

The U.S. Treasury has spent or pledged about $350 billion that Congress allocated last month to embolden financial institutions to jump-start creditworthy businesses and consumers and, thereby, jump-start the economy.

And the stock and bond markets, which the announcement was intended to calm, are down further.

"Housing prices have to bottom out on their own," said Bert Ely, an accountant and public policy analyst who sniffed out the 1980s savings and loan crisis ahead of the curve a generation ago.

"I'm shaking my head over all the zigzagging and these Bush administration bailouts. The housing bubble has to correct itself. Trying to prop up the market through mortgage modifications will prolong the eventual adjustment."

Ely's point is that home ownership rates got too high. The number of U.S. households owning rather than renting their homes went from 65 percent in 1994 to 69 percent by 2004.

"That's when subprime lending zoomed in. And we've learned that not everybody can afford a house and two SUVs," Ely said.

Regardless, big lenders including Citibank, Wells Fargo and U.S. Bank have just landed about $300 billion in fresh government capital. They have launched foreclosure remediation efforts intended to keep budget-stretched-but-competent owners in homes, perhaps leading to fewer foreclosures and an earlier bottoming of home prices. If remediation efforts work, they should also bolster values in the mortgage-backed securities market.

Cents on the dollar

In recent weeks, AAA-rated corporate debt and government insured mortgages have been trading briskly at near par value. But the illiquid market for the worst of the subprime-backed bonds are trading at a few cents on the dollar -- even though half or more of the loans are performing.

Because the market for mortgage-backed bonds is so steeply discounted now, banks holding these assets are reluctant to sell them, because they would have to book a steep loss on the sales. That could weaken, rather than strengthen, their balance sheets. That's one reason the Treasury has opted instead to invest directly in the banks to shore up their balance sheets, spur lending activity and buy time for at least some of the mortgage-backed bonds to recover their value.

If that all sounds confusing, well ... it is.

"The government changing the ground rules has made it even more difficult to start to remediate some of these problems," said Dean DiBias, high-yield portfolio manager at Securian Financial in St. Paul. "The ultimate healer is going to be time. It's going to take time for consumers, especially when they are losing jobs, to [shed debt]. And there's a reasonable consensus building that it's going to take until the spring or summer of 2009 for the consumers and banks to deleverage."

DiBias said the infusion of government capital into financial institutions "will have a multiplier effect eventually. It will have a greater positive benefit ... than the government just buying some of their assets."

Historical perspective

Let's remember how we got here. It took several years of artificially low interest rates, greedy mortgage brokers putting unqualified borrowers into houses and a mistaken conviction by lenders and borrowers that housing prices would always go up.

Let's not forget the failure to regulate credit markets. After two decades as Federal Reserve chairman, the brilliant-to-bumbling "maestro" Alan Greenspan apparently was more interested in pleasing powerful politicians than in being a responsible shepherd of the economy.

It's still going to take more pain and time to work this out. However, I still believe the stock market will rise in the fourth quarter and we will be in a job-producing economic recovery by spring.

Money manager Keith Tufte, a veteran of Wall Street and hedge funds who now runs his own Eden Prairie-based firm, told clients Thursday that Barack Obama's election as president, existing and pending federal moves to bolster the economy, some loan remediation and lower oil prices and interest rates will soon inspire more confidence, more spending and investment on Main Street. And that spells recovery.

Volatile stocks

The stock market, a daily barometer of investor sentiment, was down Friday, down for the week and is off about 36 percent this year.

"I am still concerned about the large amount of cash the hedge funds need to raise to fund redemptions [of fleeing clients]," said Mary Daugherty, a veteran money manager who teaches portfolio management at the University of St. Thomas.

"I think that is causing stock market difficulties. Whenever there is some strength ... and the market moves up, the hedge funds sell into the strength to raise cash. I don't see that being resolved until next month."

If you've got capital and time, this is a period of great opportunity to wait out the stock market and to keep buying good equities while they are cheap.

In the bond market, DiBias said he's holding discounted mortgage bonds and looking for other good values in distressed debt.

"A lot of smart investors think things are cheap," said Ely, of Washington.

"A lot of hedge funds and other investors have pulled out of the market. A lot of new investors have yet to step in."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com