Last week I pointed out that I had started saying "more than a year" ago what Chicago economist Casey Mulligan just recently realized, namely that the hope of government bailouts caused or at least exacerbated the frozen market in "toxic" assets.

Because I was far too lazy to document my bold claim, I promised a signed copy of my new book to the reader who could find the earliest online example of me saying this.

The deadline for submissions was last Saturday, and by my reckoning Dave F. is the winner. He found me saying the below in the June 2008 Freeman (and note that the first sentence is one element in a list of bad policy moves that I am describing):

Accepting mortgage-backed securities as collateral for short-term loans. On March 11, the Federal Reserve announced the Term Securities Lending Facility, authorized to lend up to $200 billion of the Fed’s holdings of Treasury securities to primary dealers in 28-day loans. The Fed agreed to accept MBS as collateral for these loans. The move promoted “liquidity” because it is much easier to raise cash in the market with bonds issued by the federal government (Treasurys), rather than securities tied to mortgages at risk of massive defaults.

There are several problems with this arrangement and others like it. First, it obviously puts taxpayers on the line if the primary dealers default and the Fed is stuck with (grossly overvalued) MBS. Second, it intensifies the moral hazard discussed above; it benefits those who hold a large amount of MBS—precisely the investors with poor foresight. Finally, it perversely encourages holders of MBS to keep them off the market, since the Fed will accept them at an unrealistic book value.

To repeat, the problem in the credit markets isn’t simply the massive losses from bad loans. It’s also the uncertainty caused by the large holdings of derivative assets tied to mortgages. Only when institutions bite the bullet and begin selling these assets, presumably at large losses, can realistic market prices be established. Only then will banks be able to assess each other’s creditworthiness, and only then will they begin lending freely to one another. Government efforts to prop up the MBS market perversely stall this shakeout.

So I will let this sit for a day in case there are any challengers. (I had to get up at 5:15 this morning so my blog analysis skills are not in optimal condition.) But barring any challenge, Dave F. is the winner!