Paul Krugman Is Right!
A "nonrecourse loan" BTW, is a loan where your risk is limited to losing the asset which the loan was meant for. The creditor cannot demand that you compensate him if the value of that asset is lower than the value of the loan. In this case, this means that since the nonrecourse loan provides 85% of the financing, your potential loss if the return surprised on the downside is only 15%. But in case the return surprises on the upside, your potential gain is unlimited.
Meaning that even though the expected value of the asset is really only $100 from the point of view of the overall economy, the expected value is $130 for investors-and -$30 for the government using Krugman's illustration. The exact expected value would be smaller or greater depending on how big you assume the potential fluctuations are, but the bottom line that the plan represents a subsidy will hold as long as it is assumed to be possible that the asset could decline more than 15% in value. And you'd have to be pretty naive to think that no mortgage vacked security could fall more than 15% in value.