|
There are many lacunae in the Emergency Economic Stabilization Act of 2008. We do not know the criteria that will determine which money managers the Treasury will hire to buy distressed assets from financial firms. We do not know how these hired people will perform their duty. Harvard’s Lucian Bebchuk proposes that each manager be given a small sum from the $700 billion (say $5 billion) to purchase the distressed assets and that they compete with regard to the price each will offer for an asset.
The assets they will purchase are not only mortgages, but derivatives based on the mortgages, as well as collateralized debt obligations, and billions of dollars of credit default swaps that supposedly guarantee the value of mortgage-backed securities. The key unknown, however, is how the Treasury will instruct the hired help to price the securities it will offer to buy. In principle, if it were possible to rid balance sheets and the credit markets of all securities for which there is no certain price, the credit markets could resume normal performance. It is not lack of liquidity that explains undue reluctance to extend loans. It is lack of confidence in the merit of would-be borrowers who may not have the resources to repay the loans. Until more is known about the Treasury’s plans to execute the purchase of dubious assets that are on the books of firms, no judgment can be made at this stage about the probabilities of success of the federal bailout plan first proposed by Treasury Secretary Paulson. There will be problems facing firms that agree to sell assets to the Treasury. Will the remaining assets exceed their liabilities? Will they become insolvent? Will they need capital infusions? If they are insolvent should not the firms be required to file for bankruptcy? Which firms should be rescued if they are close to insolvency? Anna J. Schwartz is a research associate with the National Bureau of Economic Research and a frequent guest speaker at AIER. A recognized authority on monetary economics and is best known for her collaboration with Milton Friedman on A Monetary History of the United States: 1867-1960.
|
Preston Groleau