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|How to Find an Invisible Hand?|
Sep. 22nd, 2008 at 8:34 pm
It seems that the key to the current financial crisis is that we’ve misplaced the invisible hand.Â I certainly can’t see it.Â My understanding is that because nobody wants to buy any more mortgage backed securities at the moment they are worthless.Â But of course in another aren’t worthless because they represent loans, many of which are getting repaid and others that have gone into foreclosure.Â Since these loans and properties are clearly worth something the securities must be worth something, but nobody wants to buy them at the moment.Â Possibly because they are so complicated that they are difficult to price in a rapidly declining housing market.
Enter the US government.Â Soon to be given $700 billion (that’s nearly $2,000 for every man, woman, and child in the country) to buy (and then sell and then buy some more) these securities that nobody wants.Â Oddly the government could come out smelling like a rose if they manage to buy them for less than they are worth.Â Or they could lose quite a bit of money if they price them poorly, though it seems unlikely that the whole $700 billion would evaporate.
In either case it seems that in a sense the next administration is being set up to fail given that we’ve just tied up an enormous amount of money for the foreseeable future.Â If nothing else this will be interesting.