The US Financial System is a Series of Tubes

So Treasury finally(!) reveals the details of bank rescue plan (the NYT story here and the official white paper here). As I was reading through the white paper, one thing caught my eye:

A variety of troubled legacy assets are currently congesting the U.S. financial system.”

The first thing that comes to mind when I saw the word “congestion” is Ted Stevens! A series of tubes! It’s hilarious to me that Ted Steven’s most likely legacy among people my generation is that one particularly unfortunately metaphor. Nevertheless, I will continue to exploit it on every possible occasion.

But on a somewhat more serious note, I have my doubts about this plan. I wish that it succeeds spectacularly, but that wish is undermined by one fundamental objection. That is this: you can’t really “price” the market value of these bad assets if investors are getting money from the federal government to purchase them. Sure, the auction system gives the appearance of a true pricing mechanism, but since most of the money to purchase comes from the government, private investors probably won’t behave as they would in a true market. It’s more likely that the value of these assets, determined by the mechanism set out in the Treasury plan, would be higher than it actually is.

Or, the worse scenario is that even with this somewhat boosted value, these assets still might not be valuable enough to attract enough private capital to really revive the financial institution. Either way, Treasury is on the books for a ton of money, and if these assets do end up turning a profit, it’s the private investors that get the vast majority of it. And if these assets don’t make money, well, you know the rest.

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