Comments on: Can There Be Market Solutions With No Real Markets?

By: Pricing The Unknowable | Randall Bennington

Pricing The Unknowable | Randall Bennington — Mon, 27 Apr 2009 20:00:00 +0000

[...] Barry Ritholtz makes the point that valuing toxic assets is not just part of the problem, it is THE problem for which the Fed and Treasury have no good solution: There are Markets, and then there are markets. I am less sure that Larry Summers understands the differences between the two. … [...]

By: howard0339

howard0339 — Tue, 31 Mar 2009 08:24:16 +0000

Next we get to see what the various government “inspectors” identify as
“systemic risk.” Talk about in the eye of the beholder…..

By: Benedict@Large

Benedict@Large — Mon, 30 Mar 2009 19:47:20 +0000

It seems to me that the problem is not in “Mark to Market” accounting, but rather that these institutions did not price in illiquidity when these instruments were initially booked. Now that their illiquidity has forced itself to the forefront, they cry loudly that there is an accounting problem, when in reality the real problem (“irrational exuberance”) was there but unrecognized on day one. In other words, they fucked up.

By: flipspiceland

flipspiceland — Mon, 30 Mar 2009 16:05:45 +0000

“Banks” didn’t do anything. But the senior mangement, all the vps, the mortgage originators within those banks did. Their incentives were geared to make these transactions, offload the debt for cash and do it again.

They were not stupid, these people. It was intentional, it was very lucrative for a long time, and those who have walked off into the sunset with gigantic fortunes knew precisely what they were doing.

By: tz

tz — Mon, 30 Mar 2009 16:04:46 +0000

They did NOT “create new markets” for the sometimes collectible securities. They could have created an exchange. Last time around the “market” for junk bonds was Milken’s desk in California. When there is no public exchange or something similar (Even food is sold at grocers and cars at dealers), there is no “market”, just a series of unique private contracts.

They could price them as they wanted, value them as they wanted. They were placed more than sold or auctioned.

Mises noted the key function of a market is price discovery. The more free and open the market, the better the price information.

What it should have read is “We can create a private cartel where we set prices on individual non-fungible instruments and collect huge fees”.

There are shares in things like oil and natural gas trusts and all the wells are different. Instead of a MBS, they could have created an ETF with a ticker, or even standardized packages (e.g. some number of 30 year fixed X% mortgages) which would trade on an exchange, but then it wouldn’t be a cartel.

By: Mannwich

Mannwich — Mon, 30 Mar 2009 14:18:55 +0000

Oh, they believe in “free markets” alright. They just don’t like it when their team loses at their own game and so they change the rules midstream to ensure that doesn’t happen.

By: gringcorp

gringcorp — Mon, 30 Mar 2009 13:46:19 +0000

Which makes me wonder why the investment banks were, and I believe are still, pouring huge amounts of effort into establishing “dark pools” (scare quotes warranted) where large institutions can trade securities without any wider scrutiny

By: Moss

Moss — Mon, 30 Mar 2009 13:33:37 +0000

Deification indeed. Where is Mother Theresa when you need her?

BR: Would be good to begin looking at the various instruments being bandied about for the ‘market’ of some of the PPIP assets. I hear PIMCO, Legg Mason, Blackrock and others talking up the various funds they plan to introduce for general public consumption.

By: Steven Bowles

Steven Bowles — Mon, 30 Mar 2009 13:30:18 +0000

The banks buy hard to value and illiquid assets every day – its their function. Assets such as personal loans, mortgages and corporate loans have always been accounted for at amortised cost under ‘loans and receivables’. All our problems stem from allowing banks to treat what should be ‘hold to maturity’ assets as trading assets and thus marked-to-market. Unless an item is level 1 or level 2 (mark to market or mark to model) then it should by law be accounted for as a loan and receivable. No chance of a quick profit and so no motivation to get involved in CDO tranches etc. would never have allowed the bubble to build in the first place.

By: JasonF

JasonF — Mon, 30 Mar 2009 13:28:59 +0000

No, the Market solution worked just fine: those companies were crushed by the Market for their stupidity, and, as you write about very well (I read your great blog every day), by not letting the Market crush their stock- and bond-holders too, we’ll simply increase moral hazard to make it even more difficult for the Market to do it’s job in the future.

In the even larger Market for politicians (votes instead of dollars) we’ll hopefully see those responsible for Freddie, Fannie, lax SEC enforcement, etc. get crushed too (voted out of office).

And in the even larger Marketplace of ideas and culture we’ll hopefully see both Democrat and Republican economists/politicians get horsewhipped for the harm they’ve caused the public through lax Fed policy, gigantic state and federal deficits, our multi-trillion dollar “Keynesian experiment” of the next ten years, and the Ponzi schemes of Social Security, Medicare and Medicaid of the next 30 years.

The horrible thing is how much Main Street is going to suffer, but unfortunately that is a Market process too, it might be called Reality Bites Back: you can’t create wealth simply by having politicians sign a piece of paper or by having the Fed crank up the presses.

So the capital-M “Market” is still working as always, it’s just that some feedback loops take years or decades to go through their cycles. It’s not that the Market isn’t a modern Deity, it’s that this Deity is unfortunately very very harsh in enforcing its rules.

Barry, I know that you’ve got an agenda to combat naive Market Catholicism out there, and I don’t disagree with it, but right now there is the danger of an over-reaction in the opposite direction being fueled by populist rage which threatens our long-term freedom and prosperity, and sometimes your blog contributes to it when your finer critiques can be easily misconstrued as a rejection of the fundamental long-term value of free market capitalism for human welfare. People can mistake your critique of the details of today’s particular laws or events as arguments against capitalism as such. So I hope you keep your critiques and commentary going, it’s great stuff and very healthy, but sometimes reaffirming the value of free market capitalism (broadly defined) would be beneficial too.

~~~

BR: Jason, That’s a fair point. I am not the cheerleading type, and try not to wax rhapsodic about things I believe are obvious.

That said, I pointed out over the weekend that I thought Krugman’s critique of securitization was misguided:

Paul Krugman is Wrong About Securitization (March 28th, 2009)
http://www.ritholtz.com/blog/2009/03/krugman-is-wrong-about-securitization/