Let’s All Play?
- Posted by ryan on March 24th, 2009 filed in Economics
On the question of whether individuals should be able to take large government loans in order to purchase packages of bank assets of unknown value, Megan offers three potential problems:
- It’s only a sweetheart deal if you at least kind of know what you’re doing. Look at the stock market crash, and tell me that the broad public needs to be given the opportunity to take highly leveraged bets on complex securities. They couldn’t even figure out that Kosmo.com wasn’t going to work.
- Adding the public to the mix defeats the alleged purpose of the program, which is price discovery of the probable value of these assets, a la James Surowiecki’s The Wisdom of Crowds. The public has even less idea than the bankers as to what these assets might be worth. If you substitute some sort of government manager, he won’t particularly care what they’re worth; it’s not his money. Wall Street will do a very imperfect job at valuing these assets, but the public will be even worse.
- Non-recourse loans aren’t costless to individuals: they show up on your credit score if you default, which is why foreclosure is so painful. Is Congress going to mandate that the credit bureaus ignore this information? You could mitigate this by setting up an intermediary, but that has substantial administrative costs, and almost certainly wouldn’t be ready by go-time.
I disagree with 2 — dumb money creates the opportunities for smart money and helps markets function better. Of course, there are two things to think about then: 1) do we want average Americans to be the dumb money making profit opportunities for the smart money, and 2) if the state of the financial world is still such that correlations between assets are all at one, then there’s no such thing as smart or dumb money in these auctions. But for me, the main concern is 1.
Her other two points are very good ones, particularly the fact that individuals suffer pretty big consequences when they default on a loan. But I’d mainly emphasize that taxpayers will already have plenty of exposure to these markets, and I’m not really sure what their inclusion is supposed to accomplish, other than some feel-good idea that they get to have the fun the bankers have.
March 24th, 2009 at 2:59 pm
Who’s to say the public is stupider than the bankers? The bankers have been pretty stupid lately. That aside, individuals might well be able to devise better models for valuing distressed assets than “professionals”.
Like the Netflix recommendation contest, letting everyday people try participating could well encourage people with good financial analysis skills to put together their own algorithms and outdo the bankers. If they do, not only will they make money, but the entire market will operate more efficiently as a result.
March 24th, 2009 at 3:11 pm
Dave, if people want to compete in a contest to generate an algorithm to value various assets, then I have no problem with that. If people want to borrow from the government to bid at auction against hedge funds on various obscure financial products (what percentage of the American population, not already involved in the financial industry, can define CDO?), I have a problem with that. I don’t actually think bankers were stupid so much as they acted recklessly within the lax regulatory environment in which they found themselves. Many of them got very rich. But I know that a PIMCO participating in one of these auctions will have the basic competence to know what the products at auction are, and the resources to do due diligence on what the stuff in them is, more or less. John Q Investor would be gambling at best, and a sheep among wolves at worst.
March 25th, 2009 at 10:31 am
Taking out loans to purchase assets of unknown value sounds uncomfortably close to gambling. If I wanted to gamble uncomfortably, I’d stick with putting squirrels down my pants.
March 25th, 2009 at 12:15 pm
As has been pointed out elsewhere, the reference to kosmo.com in point one is pretty off-base and ironic. Kosmo wasn’t publicly traded. It wasn’t the general public that didn’t the flawed business model. It was the “experts” (mostly VCs) you and Megan laud who’ve screwed up those highly leveraged bets on Kosmo…and on mortgage securities, and on credit default swaps, etc, etc.
March 25th, 2009 at 3:15 pm
It’s always amusing to hear the Media Morons saying the “no-one understands these things” line. I, and a bunch of people I know could certainly strip these things down and assess the risk.
You may be as dumb as Chris Matthews, not everybody is.