A Treasury Department press release offers a statement from Secretary Paulson.

The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.

Read the whole thing. What struck me were all the plumbing metaphors. You can almost picture Hank, with his pants riding down a couple inches, leaning over the financial toilet bowl and telling you that there is a lot of, er, stuff, in there that needs to come out. Then it will be un-clogged and we’ll all be ok.

He’s probably right. But let’s pose some questions.

1. In Japan’s “lost decade,” they propped up the banks that had the bad loans on their books. Most economists think that was a bad idea. It kept the saving of the Japanese from finding its way to investments with good returns. Could we be repeating that mistake?

2. See Steven Randy Waldman, to whom I linked this morning. Of all the ways for government to spend money, is this the most socially useful?

3. Housing starts have dipped below one million at an annual rate, the lowest pace in umpteen years. I’m stunned that they haven’t dropped to zero. No one needs new housing developments. Are the builders on crack, or do they expect Congress to buy their houses, which would mean that Congress is on crack?

I want to see the excess inventory of unoccupied housing go way down. I want to see houses that are either rented or bought by real owners, meaning 20 percent down payments. The sooner we get to that point, the sooner we’ll know who lost what on mortgage defaults.

As for the financial system, we’ve got banks. Maybe give them a break on capital requirements at the margin to make good loans. Otherwise, I’m not sure we shouldn’t just sit back and let things sort themselves out.