Downing made his Hammers debut in Saturday's 2-0 Barclays Premier League victory over Cardiff City at Upton Park and brought pace and invention to the game during his 20-minute cameo.
West Ham will still be missing Andy Carroll, out with a heel injury, for Saturday's trip to Newcastle, but Collins is thrilled by the prospect of the former Liverpool team-mates reuniting.
"Stewart looked very sharp - he's always the same. I played with him at Villa and believe that we have got an absolute bargain," the Hammers defender said.
"Hopefully we've got the Stewart Downing of a couple of years ago when he was tearing defences to pieces at Aston Villa.
"Obviously it didn't go well for him at Liverpool, but he did very well against Cardiff and hopefully we can get him firing.
"The thought of him playing with Andy is great. They played together at Liverpool and they get on well off the pitch as well.
"They are both from the north east so have that certain understanding, which could be great for us."
Collins spent five years at Cardiff until 2005 and is confident the big-spending Bluebirds will survive their debut season in the Premier League.
"I think they'll be all right, but it's going to be tough for them. They have spent a lot of money and they have got some great players in there," the 29-year-old said.