Some random thoughts on the state of the econopocalypse.
First, Kevin Drum responded to those who panned Tim Geithner’s decision to basically pay banks whatever they want for crappy mortgage assets.
This is all true, but it’s a little too glib. After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There’s a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.
Speaking of glib, as much as I normally love Drum his point here essentially boils down to postmodernism. How can we know that mortgage-based derivative securities don’t have some hidden value? How can we know that derivative securities are not themselves a linguistic construct with no more transferable meaning than a flying, numenous being of spaghetti and sauce? I suppose at gunpoint I would admit that any number of scenarios are theoretically possible.
That said, every real indicator suggests that the best mortgage securities will pay off at pennies on the dollar and much of the rest are a rounding mistake away from worthless. One of the magical characteristics of these securities is the extent to which their value evaporates in a market where home values fail to grow. Taxpayers will almost certainly take a bath on any plan that guarantees private buyers against losses or employs some other clever but functionally equivalent bailout scheme.
If we get past the moral hazard aspect of insulating major firms from their own bad decisions (note: not ready to do that), I still do not understand why anyone regards a plan based on gauzy wishful thinking as more “serious” than the Swedish nationalize-sell-return to work approach. Snark at sites like Atrios about Tim Geithner’s martini pals sounds more credible when this is the best plan he can offer.
On a related note, Ben Bernanke.
Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.
To rephrase shorter and less charitably, the current and future Fed Chair takes “too big to fail” non-bank institutions as a given and wonders how government might change itself to better serve them. Does that strike anybody else as precisely the wrong perspective? There is no reason why the government should make a habit of saving investment firms like Goldman Sachs and Merrill Lynch. If we’re going to nationalize risk then we might as well nationalize the gain and call ourselves Soviets.
Contra Bernanke, the normal person perspective would ask how we can structure the financial industry so that an awfully run firm can fail (that is the “free market”, kids) without opening the seventh f*cking seal. The idea that government needs to figure out how to accommodate too-big-to-fail cowboy firms is, to put it mildly, batshit crazy. Government needs to ‘wind down’ over-leveraged firms until they’re not too big to fail any more. If there’s any free time after they manage that, government next needs to find a safe place to stash any moron who still thinks otherwise before said moron goes Galt with the department budget or staples his dick to the wall.
Maybe my reaction to Ben Bernanke misinterpreted his point. It’s possible, I’m pretty sleep deprived and only mostly sober. If his point is that the government needs a strategy to wind down too-big-to-fail (TBTF) cowboy firms until such an entity does not exist any more, then selah.
However, even giving Bernanke the most positive spin I still think that he sees the issue wrong. The problem is not that the government doesn’t have a plan to wind down failed TBTF’s; the problem is that such firms exist at all. As soon as we acknowledge that a firm can’t fail without dragging the country with it we give the firm blackmail power over the national economy. We need a new round of antitrust-type laws that trigger as soon as a firm gets big enough. Ideally we can split up [Update: or de-leverage or whatever] a group like AIG before its failure turns entire zip codes into weedy forbidden zones.