Neu Leonstein
24-03-2008, 01:56
http://www.nytimes.com/2008/03/23/business/23view.html?_r=2&ref=business&oref=slogin&oref=slogin
[...]
To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.
The subsequent poor performance of planned economies bore out his point. For instance, the Soviet Union did a poor job of producing consumer goods and developing innovative industries. In the absence of well-functioning markets for capital goods, these mistakes festered, rather than being rectified by the independent judgments of individual entrepreneurs.
The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.
Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.
The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see.
[...]
In the shorter run, economists are generally in three camps when it comes to strategies for recovery.
The fundamentalists argue that housing prices need to fall, and rapidly, so that mortgage-backed securities can be valued more accurately. Then trading can resume and financial gridlock will be undone. Advocates of a bailout, by contrast, argue that this process would be a disaster. In their view, the solvency problems are too great and the market is too skittish for the foreseeable future, so the government needs to buy up mortgage securities to prevent catastrophe.
The third group, the “wait and see” faction, finds the first two alternatives unpalatable. This group hopes that if the Fed pumps enough liquidity into banks, the passage of time will improve market information, ease worries and lead to a resumption in asset trading.
[...]
A lot of people who are quite serious advocate of laissez faire policies are getting the jitters now as their faith in the market to resurrect itself any time soon is waning. In Germany Deutsche Bank boss and national punching bag Josef Ackermann said that he thinks government intervention will be needed to get things back on track (much to the chagrin to the mob, of course).
Personally, I think the market can sort itself out, but it would take time and be a bit painful. It would involve this sort of situation continuing until there is some turnaround in foreclosures and it becomes clear that the worst is over for mortgage-backed securities. And at that point the bigger banks who sit on a bit of cash might start seeing buying opportunities.
Of course this period of waiting would do damage to the real economy and might therefore cause more foreclosures than would otherwise have been the case. A bailout could unclog the market quickly but at a risk to and expense of the taxpayer (which is the part I don't like). That would take the form of central banks buying these papers more or less directly, assuming the risk of foreclosures and a lack of a market for them and leaving banks free to go off and play again. I have a feeling Bernanke really doesn't want to do that, and central banks have denied any plans (http://www.theaustralian.news.com.au/story/0,25197,23420220-36375,00.html), but who knows (http://www.bloomberg.com/apps/news?pid=20601087&sid=ad0zneiPUVjA&refer=home).
I'm probably in the "Wait and See" category because the other two alternatives just suck so much. I don't envy the decisionmakers right now.
So how has this affair affected your outlook of this market in particular and the market mechanism in general? Which camp do you belong to?
[...]
To understand the depths of the current crisis, let’s go back to an apparently unrelated episode in economic thought: the socialist calculation debate. Starting in the 1920s, Ludwig von Mises, the leader of the so-called Austrian School of Economics, charged that socialism was unable to engage in rational economic calculation. Without market prices, he reasoned, no one knows how much economic resources are worth.
The subsequent poor performance of planned economies bore out his point. For instance, the Soviet Union did a poor job of producing consumer goods and developing innovative industries. In the absence of well-functioning markets for capital goods, these mistakes festered, rather than being rectified by the independent judgments of individual entrepreneurs.
The irony is that the supercharged capital markets of the American economy are now — at least temporarily — in a somewhat comparable position. Starting in August, many asset markets lost their liquidity, as trading in many kinds of junk bonds, mortgage-backed securities and auction-rate securities has virtually vanished.
Market prices have been drained of their informational value and thus don’t much reflect the “wisdom of crowds,” as they would under normal circumstances. Investors are instead flocking to the safest of assets, like Treasury bills.
The absence of trading is a big problem. Financial institutions have been stuck holding illiquid assets, whose value cannot be easily determined. Who wants to lend to the institutions holding them? No wonder there is a credit crisis and a general attitude of wait and see.
[...]
In the shorter run, economists are generally in three camps when it comes to strategies for recovery.
The fundamentalists argue that housing prices need to fall, and rapidly, so that mortgage-backed securities can be valued more accurately. Then trading can resume and financial gridlock will be undone. Advocates of a bailout, by contrast, argue that this process would be a disaster. In their view, the solvency problems are too great and the market is too skittish for the foreseeable future, so the government needs to buy up mortgage securities to prevent catastrophe.
The third group, the “wait and see” faction, finds the first two alternatives unpalatable. This group hopes that if the Fed pumps enough liquidity into banks, the passage of time will improve market information, ease worries and lead to a resumption in asset trading.
[...]
A lot of people who are quite serious advocate of laissez faire policies are getting the jitters now as their faith in the market to resurrect itself any time soon is waning. In Germany Deutsche Bank boss and national punching bag Josef Ackermann said that he thinks government intervention will be needed to get things back on track (much to the chagrin to the mob, of course).
Personally, I think the market can sort itself out, but it would take time and be a bit painful. It would involve this sort of situation continuing until there is some turnaround in foreclosures and it becomes clear that the worst is over for mortgage-backed securities. And at that point the bigger banks who sit on a bit of cash might start seeing buying opportunities.
Of course this period of waiting would do damage to the real economy and might therefore cause more foreclosures than would otherwise have been the case. A bailout could unclog the market quickly but at a risk to and expense of the taxpayer (which is the part I don't like). That would take the form of central banks buying these papers more or less directly, assuming the risk of foreclosures and a lack of a market for them and leaving banks free to go off and play again. I have a feeling Bernanke really doesn't want to do that, and central banks have denied any plans (http://www.theaustralian.news.com.au/story/0,25197,23420220-36375,00.html), but who knows (http://www.bloomberg.com/apps/news?pid=20601087&sid=ad0zneiPUVjA&refer=home).
I'm probably in the "Wait and See" category because the other two alternatives just suck so much. I don't envy the decisionmakers right now.
So how has this affair affected your outlook of this market in particular and the market mechanism in general? Which camp do you belong to?