The logic of the $700bn Paulson plan is that the government should buy toxic mortgage assets from banks at prices higher than the current distressed market prices of these securities, according to Ben Bernanke.

The Federal Reserve chairman said on Tuesday that the proposed government fund could instead buy the illiquid assets at close to their estimated cash-flow based value. In doing so the government would create a new observed market price for these assets that was higher than the current firesale prices.