[lbo-talk] Wapo: Economists Question Basis of Paulson's Plan

[SA]

Doug Henwood wrote:
>
> On Sep 27, 2008, at 1:08 AM, Michael Pollak wrote:
>
>>   "The premise appears to be that the market is irrationally
>>   pessimistic," wrote Greg Mankiw, a Harvard University economist and
>>   another former Bush economic adviser, on his blog this week. "That
>>   might be so. Nonetheless, one has to be at least a bit skeptical about
>>   the idea that government policymakers gambling with other people's
>>   money are better at judging the value of complex financial instruments
>>   than are private investors gambling with their own."
>
> "Progressives" endorsing this line of thinking should step back and 
> think if they really agree that markets are wiser than governments, 
> and prices that emerge in a panic are rational.
>

I don't think that would be the "progressive" line of thinking. There is 
no such thing as the "true" value of a security; there is only the price 
it would receive in the market. The problem with this plan is that on 
the way up, the banks booked profits based on the assets' market prices, 
but now on the way down their losses are mitigated by taxpayers paying 
not market prices but "hold-to-maturity" prices, whatever that means. 
It's not that "hold-to-maturity" prices are the "wrong" prices, it's 
that they're subsidy prices.

Seth