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Friday, March 06, 2009

Any asset is worth what someone is willing to pay for it

Posted by Jill | 5:30 AM

That's a very simple concept that Ben Bernanke and Tim Geithner don't seem to be able to understand.

You'd think that these guys, who are supposed to be the top money guys in the country, would understand this simple fact of Economics 101 better than, say, the builder of the unfinished McMansion three blocks away from my kitchen window, who has been trying to sell his unfinished spec house for over a year now, dropping the price from $1.5 million to $1.35 million to $1.249 million -- and no more -- while similar bash-and build houses in the neighborhood languish on the market for $849K. But you'd be wrong, as Paul Krugman points out today:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

[snip]

So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

And why is it unthinkable? Because Republican politicians who are still fighting the Cold War and the same cable news idiots that Jon Stewart and the Daily Show writers so masterfully skewered the other night will scream "SOCIALISM!!!"

This knee-jerk wingnut terror of "the S word" is why we don't have universal health care in this country, with over half of the low-income unemployed without coverage already. And out here in the real world, almost three-quarters of Americans want Federal involvement in the health care distribution system to reduce costs and increase access and six in ten favor think it's the government's responsibility to provide such coverage and access. When the price of laissez-faire subsidize-the-rich corporatism starts to hit home in the form of unemployment and loss of health care coverage, Americans begin to realize the human cost of unfettered Objectivist capitalism, and they don't much care for it.

So while Bernanke and Geithner don't dare take the bols step of nationalization, instead making the absurd claim that toxic assets are "undervalued", they've forgotten the very basic principle that no asset is worth a plug nickel unless someone is willing to pony up the bucks for it.

Labels: economic death watch, Paul Krugman

3 comments

3 Comments:

Unknown said...

Believe me, I'm no socialist. But I fail to see how putting the banks in receivership, making them solvent, and reselling them is any more "socialistic" than simply throwing billions in taxpayer money at them every month with no end in sight, hoping they'll magically get better.

Indeed, how different is this whole "nationalization" scheme than what the FDIC has already been doing for the better part of a century? Instead, the administration would rather stand around desperately trying to reinflate a credit bubble. Good luck with that.

3/6/09, 6:32 AM

Distributorcap said...

socialism - you want NO socialism - get rid of social security, make people pay to ride on any road. you want a war, write a check. how about corporate socialism in the form TAX BREAKS for oil companies and ag subsidies. dump FEMA - hit by a hurricane in deep red texas, you are on your own - and if you cannot afford private storm insurance, you live with the flood.

i love how people pcik and choose their socialism, like religion

3/8/09, 1:03 PM

Anonymous said...

Why can't someone write a book explaining what is called by the foolish "socialism". Maybe if the man in the street understood it better he just might be more accepting. The only way we willever have national health insurance is if the government is the single payer, even if they are always trying to cut medicare. As one of the seniors I can truly say "it works". Keep it up!!

3/9/09, 11:26 PM