Here it is the Geithner financial rescue plan. It's dealing with "The market of lemons"
I'm posting some self-explanotary images, the way I see it:
I am impressed by this point:
Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.
If some unidentified potentially insolvent banks created a severe “lemons problem”, that is a situation of asymmetric information which causes money market failure and confidence crisis in inter-banking, interventions must address the causes not the effects. Again during these days interventions addressed only some effects and never the causes. Before doing something we should invite banks, particularly those in favor of which any intervention is made, to publicly disclose their positions and make their balance sheets fully transparent, thus addressing the lemon problem. There is no point in recapitalizing and restarting inter-banks lending, forcing or guaranteeing confidence, if no disclosure is made of mutual positions and off balance sheets operations which are causing money market failure. How can we expect confidence to be back if nobody starts to tell the true story and make an effort to admit mistakes? I think this is what markets and people are expecting before confidence is restored and thus liquidity and solvability problems.
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4 comments:
I agree Massimo, the lemons model applies. For that reason, I am against any relaxation of mark-to-market accounting.
If we agree that the lemons model applies any accounting "manipulation" or change in standards just would help the lemons' seller, that is the banks, not necessarily the market particularly lending and competition. It does not change the terms of asymmetric information. Moreover it does not solve any difficulty in pricing toxic assets (which I also call lemon products) as it appears that simply nobody know anymore exactly amounts, risks, counterparts, etc. If they are lemon products they should be withdrawn from the market, together with insolvent banks, and "disposed of" gradually over time as and if they are absorbed by markets and investors. At this stage is not anymore a mere accounting problem. Marking-to-market presuppose that there is a market, fully functioning. I am not sure about that as we said there is a market but it's a lemon market. Would you buy a lemon, even fully insured? I prefer new cars...not even guarantee by dealers I like as they want to sell them...
Personally, I think there is no need to force withdrawal of the products that became lemons. The problem was that people who did not understand them were willing to buy them. After the losses that have been sustained, I expect that in future, only mechanics will buy lemons, and that may not be a large enough market to sustain much production.
@RebelEconomist As it appears that there is no equilibrium price, no market and banks are not able event to price let alone sell their toxic assets I do not see many alternatives. Moreover the mere existence of toxic assets is affecting the proper functioning and competition in the credit market. The bad drive out the good in the lemon market.
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