Wednesday, October 1, 2008

Value II

Speaking of value, Paulson is claiming that the reason these mortgage-backed securities are untradeable is because no one knows what they’re worth, and therefore can’t price them. His original plan claimed to use the the $700 billion as a method of “price discovery”, whereby he would set a market price for these securities. Which is a crock of shit.

Why does he think he knows better than all these firms (who deal with this every day), what the market value of these securities should be?. Paulson is an educated man. He knows better. Therefore, he has to be lying.

But watching CNBC today, with all these people throwing ideas around , and the market reacting every time someone important opened their mouth, it occurred to me that the real reason that the market for these securities is non-existent is not because no one has any idea what they are worth, but because no one has any idea what they’ll be worth tomorrow!

If the government is going to go in and buy $700 billion worth of securities, then that will change what they are worth today. But because we have no idea what the government is going to do, we have no idea what these things are worth.

If Congress and the President would simply say that no bailout is going to happen, then people could move forward with figuring out what things are actually worth. And the corollary, of course, is that if we just bail companies out all the time, arbitrarily, then their value will tend to be arbitrary and capricious.

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