01 October 2008

Another Piece

A very good post by Judge Richard Posner. He's more amenable to socializing our financing system, but it is a very good synopsis of what/how/why. Favorite bit:

Many lenders have so much of their capital tied up in mortgage-backed securities
or other novel forms of capital that are difficult to value that they cannot
attract new capital at a price that would enable the lender to continue in
business. The sale of the securities would just expose their lack of value. The
federal government, however, has essentially unlimited capital because of its
taxing power. It is prepared at this writing to contribute perhaps as much as a
trillion dollars to rebuild the capital of the banking industry. The Treasury
wants to make this contribution in the form of buying the dubious securities,
but that seems to be a mistake, unless pressure of time allows for no
alternative. If the Treasury pays the actual value (if anyone can determine what
that is) of the securities, it will not be injecting new capital into the
banking industry, but merely swapping one form of capital for another. If the
Treasury pays more than the securities are worth, then it is contributing
capital to the industry all right, but it is also enriching the owners and
managers of the banks, which creates the familiar moral hazard problem as well
as upsetting people by rewarding careless management practices. The more it
overpays, the most costly the bailout plan to the taxpayer.

The question is where to go next.

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