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.
This echoes a post Tim Duy wrote a few days ago:
Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply "bad." For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.A world in which the assets are worthless is very different from a world in which the assets are underpriced due to a temporary market hysteria. Worthless assets mean the banks are insolvent and the government will have to step in to clean them out. Underpriced assets mean the government -- or private investors -- can simply buy the assets and wait for them to appreciate. The real worry, however, is a world in which worthless assets are treated as underpriced assets: In that scenario, the government pays a lot of money to acquire assets that never regain their value. We don't save the banks so much as subsidize them.
