…comes today from Francis Cianfrocca, a New York businessman who posts at redstate.com under the name “blackhedd.” Quick take:

The biggest and most important questions regard the valuation at which the mortgage-backed securities will be purchased from the participating banks and Wall St. firms.

How many pennies on the dollar? And who will make that determination?

Banks and Wall Street firms are suffering because they own large amounts of mortgage-backed securities and related derivatives that are now worth less than they paid for them. The losses mean that they can’t go forward from here and fund new investments in productive business activity.

Ideally, you’d want to sell off your bad assets and either continue life with a smaller balance sheet, or else raise additional equity capital to start growing again. Neither option is available as things stand.

The point of the [bailout] is to provide a bid for the bad mortgage-based assets that, in Paulson’s words, are “clogging the balance sheets” of many financial institutions. He wants to provide a market so that financial firms can sell these assets and get on with life.

The price at which they will be sold is all-important. Get it too low, and you’ll put a lot of firms out of business, because they will be forced to realize capital losses they can’t recover from.

Get it too high, and you’ll be doing two extremely bad things: you’ll be rewarding banks and Wall Street for making bad decisions; and you’ll expose the taxpayers to losses and inflation.

So the key question for Paulson and Bernanke is: who will be determining the valuation? You want above all to make sure that this job is done right, which means getting the best available people from the private sector to do it. How will they be compensated, and what are their incentives?

Already Barney Frank is saying that the people who do the valuation must not be allowed to make a lot of money. How do you get really top people on that basis? Given the dire implications of getting this wrong, it’s charitable to say that Mr. Frank is being shortsighted and probably a little vindictive.

The really deep problem I have, however, is this: what if the true, correct valuation of distressed mortgage-backed assets is actually very, very low? Like, say, five or ten cents on the dollar?

This outcome, if it happens, would be reflective of the fact that the housing industry significantly overbuilt, in response to the price bubble that burst in 2006. And that’s a misallocation of resources that simply can’t be willed away by bailouts, taxpayer handouts to Democratic constituencies, or fairy dust.

If that indeed is where we are, then the [bailout] will solve the near-term liquidity crisis, but not the longer-term credit crisis. And the US may be facing a long, possibly multiyear period of very slow economic growth.