23 March 2009

NYT Columnist Paul Krugman *Sighs*

In this morning's New York Times, Op-Ed columnist Paul Krugman hated on the Administration's toxic asset program. I suppose I can't blame him, it's way easier to make easy arguments than defend complex ones.

But when you hold a Phd. in Economics from MIT, and have been a distinguished academic at the London School of Economics and Princeton University, I expect you to use microeconomics and calculus to minimize the amount of fuel, calories and time needed to mow your own lawn, not to mention if you don't do your job, who else can the New York Times pay to tell liberals what to think.

Lets start with some basics. Lousy mortgages and other suspect financial instruments are being used to back supposedly high-quality bonds. Bond markets trade largely on information provided by bond rating agencies. A consumer will buy a mislabeled turd in a Tiffany's bag exactly one time before realizing there are better things to do with hard-earned money. Similarly, supposed "assets" have burned buyers in the marketplace, and without a source for accurate information, the market cannot correctly assign a price to these assets. Interestingly, Krugman seems to identify this, suggesting that no-one knows what the value of these assets are, but then retracting into his tortoise shell of paranoia, suggesting that no effort to pull these assets from bank balance sheets will improve the lending industry. I'll address each below.

Modern Economists believe there is a price for everything. The ability of that price to represent 'actual' value can vary according to availability of markets, clarity of property rights, or accurate information about what you are buying. Think about Ebay for a moment. You the bidder have a chance to participate in an excellent forum for developing price, and truth be told information plays a huge role on what you do or don't bid on. Suppose for a moment you would like to buy a Maserati. Two ebay listings catch your eye. One Maserati includes a real photo, mechanic's records, traffax vehicle history and the other post says one Maserati with a photo of a matchbox car labeled "artist rendering". Chances are, only one of those cars will sell for more than three years of law school tuition. Similarly, when thousands of mystery bonds are all labeled 'mystery' flavored, the market must know surely this bond tastes like something, but I'm not willing to risk ending up with black licorice again. But then, the government comes in and offers a loan guarantee and says, my boy, if you buy that bond and give it a lick, and its black licorice, I'll let you buy another one and we'll see how that one works out, all I ask, is when you score some strawberry, I get a lick. Then, the whole game changes. Moral hazard? Surely. But then again, lose your car insurance and you'll realize in 10 seconds how much moral hazard you store in your lead foot. If you don't think a distribution of risk adds marketable value to an asset, then you're probably dumb enough to think that warranty on your new car was "free" too.

So fine, lets say these assets fly off the shelves like umbrellas in Oregon, then what? Does the banking industry see any benefit? Or should we believe, as Kranky-Kurmudgeon would have us believe, that Sisyphus has a better chance of getting the boulder up the mountain? I'm not here to tell you its Oliver-the-omnipotent's terrific tonic of total market correction, but surely its worth something. For one, it ends the waterboarding of corporate balance sheets. When mark-to-market forces banks to post impossibly large losses on assets of questionable value, Banks are traded according to fear of the unknown. Fresh balance sheets will allow banks to re-enter the markets and participate as creditors backed by known value. This is exactly how the market treats you. Own a house? You can use it to access credit backed by the knowledge that you have a certain ability to pay. Own nothing and addicted to heroine? You probably have to borrow money from a loan shark who knows you can't pay, since no one else will give you money, you'll agree to anything. So unless you want Wal-Mart to post payroll by running down Johnny the Squeeler, we all have an interest in the restoration of credit markets.

Or, you know, you can just complain about stuff.

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