logo

Against Monopoly

defending the right to innovate

Monopoly corrupts. Absolute monopoly corrupts absolutely.





Copyright Notice: We don't think much of copyright, so you can do what you want with the content on this blog. Of course we are hungry for publicity, so we would be pleased if you avoided plagiarism and gave us credit for what we have written. We encourage you not to impose copyright restrictions on your "derivative" works, but we won't try to stop you. For the legally or statist minded, you can consider yourself subject to a Creative Commons Attribution License.


back

Sandro Brusco on the Bailout

My friend and colleague Sandro Brusco posted the following on noiseFromAmerika.

I am reporting it here because, personally, I believe the repeated, desperate and everyday more damaging efforts by this administration, the previous, and the Federal Reserve to "save" the American banks in their current form and keep their executives and managers where they are, i.e. to preserve the status quo, is the worst case of monopolistic power being exercised on the American people in very many decades. We will pay this dearly, and for a long time, where "we", here, refers to the average guy consumer/taxpayer.

It is an insanely bad exercise in political monopoly power and economic monopoly power. Its aim is to keep a few thousands incompetent super-rich monopolists where they are, which where they should not be.

SANDRO BRUSCO'S TEXT:

The new plan to rescue banks, as described by the New York Times, looks a lot like all the older plans. The basic idea seems to be always the same: overpay the toxic assets using taxpayers' money. I don't really have much to add to what Paul Krugman has already said on the subject in a couple of posts in his blog. The approach is, quite simply, nonsensical. The relevant quote from the NYT article is the following:

Risk-taking institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The approach of this administration, and of the previous one as well, seems to be that the investors are unreasonably risk averse, or irrational, or whatever, and they should buy the toxic assets at a price closer to what the banks want. Otherwise, you see, the banks would have to ''book huge losses''. Why the market is not working is left unexplained. The solution is simply to fill the gap between the 30 and the 60 cents with a huge public subsidy.

We can only hope that this approach will fail, the same way that it failed when it was first proposed in the fall of 2008. Yes, of course, we do need some sort of intervention. The point has been made by many, and I find this exposition by fellow game theorist Sandeep Baliga very clear. But there are many different ways to intervene. In a previous post I have tried to explain how to set up a better mechanism for price discovery of the toxic assets. Other ideas have been floated. Bulow and Klemperer, for example, have suggested a clever variation on the good bank / bad bank approach. As a minimum, if the administration is really unwilling to consider new ideas (but why?), it should at least consider some variant of the Swedish approach: let the banks fail, take them over, recapitalize and then resell them.

The plan instead is to use public money to help the creditors (other than depositors, already covered by FDIC insurance) and the shareholders of the banks. No explanation is given of why private investors are so reluctant to buy the toxic assets. What if the investors are correct in their assessment and these assets are really worth no more than 30 cents on the dollar? Why should the taxpayers bear all the risk? And what if the money is not enough and we keep having zombie banks? The whole thing is almost too depressing to contemplate.


Comments

Having banks lend the money to purchase their own allegedly "underpriced" assets is an excellent idea. As Brusco says, banks won't price those assets as high if their own money is on the line. And if the government's payback is senior to theirs, they'll likely be even more realistic about the asking price.

Also, as Brusco points out, if the price paid for the assets is lower, more of them will be sold off for any given amount of money, which will resolve the problem sooner and with less risk to the taxpayer.

Why should the taxpayers bear all the risk? And what if the money is not enough and we keep having zombie banks? The whole thing is almost too depressing to contemplate. perfume animale

Submit Comment

Blog Post

Name:

Email (optional):

Your Humanity:

Prove you are human by retyping the anti-spam code.
For example if the code is unodosthreefour,
type 1234 in the textbox below.

Anti-spam Code
UnoSixNineEight:


Post



   

Most Recent Comments

IIPA thinks open source equals piracy You might find this very interesting but http://www.perfectessaysonline.com does custom essays,

Your Compulsory Assignment for Tonight There are some uncomplicated guides which describe the assignment accomplishing process step by

Killing people with patents AIDS is a dangerous decease. I have watched the trailer and it is heart touching. I wish no one to

Terence Kealey: This post is very helpful for my writing because I am doing the research paper work so I search

Dr. Who?

The Other Dr. No: HIV Researcher Fighting the IP Pirates Hi, First off, I came across your site and wanted to say thanks for providing a great HIV/AIDS

IIPA thinks open source equals piracy Buy college papers at http://buy-essays-now.com and make sure that they are the best

Let's See: Pallas, Pan, Patents, Persephone, Perses, Poseidon, Prometheus... Replying to Stephan: As I noted elsewhere, I'm fine with abolishing the system, just don't think

The right to rub smooth using a hardened steel tool with ridges Finally got around to looking at the comments, sorry for delay... Replying to Stephan: I'm sorry

Let's See: Pallas, Pan, Patents, Persephone, Perses, Poseidon, Prometheus... This is very useful post for the people. I want to write this types article but I do not know about

Let's See: Pallas, Pan, Patents, Persephone, Perses, Poseidon, Prometheus... Seems like a kinda bizarre proposal to me. We just need to abolish the patent system, not replace

The right to rub smooth using a hardened steel tool with ridges I'm a bit confused by this--even if "hired to invent" went away, that would just change the default

What's copywritable? Go fish in court. This post is providing very useful and informative information for the students. I like this post

Update and critique of the proposed GOOGLE settlement Hi!) Informative article about Google INC. I agree with you, that Google is a huge company, that

IIPA thinks open source equals piracy Do you suffer from loads of academic assignments? http://marvelous-essay.net will help you to

The right to rub smooth using a hardened steel tool with ridges Thanks for the information! It's good to know that there are some places showing the consequences

Do we need a law? @ Alexander Baker: So basically, if I copy parts of 'Titus Andronicus' to a webpage without

Do we need a law? The issue is whether the crime is punished not who punishes it. If somebody robs our house we do

Do we need a law? 1. Plagiarism most certainly is illegal, it is called "copyright infringement". One very famous

IIPA thinks open source equals piracy Good post. Thanks for this information. By the way, if students want to get rid of their