dagblog - Comments for "Public-private partnership proposal poses plenty of problems"

i think you meant the former,

Deadman — Sat, 21 Mar 2009 21:03:41 +0000

i think you meant the former, but i understood!

We're pretty much in

Michael Wolraich — Sat, 21 Mar 2009 20:39:22 +0000

We're pretty much in agreement, but my even less qualified gut says the latter. Not because I know anything about their value but because I believe that the market psyche is extremely pessismistic right now. When it's optimistic, I assume that assets are overvalued, when it's pessimistic, i assume that they're undervalued.

it's a fair point, and i

Deadman — Sat, 21 Mar 2009 20:19:00 +0000

In reply to This is a good post. I'm not

it's a fair point, and i tried to make it clear that our options aren't particularly great. A fully public strategy would positively overwhelm our balance sheet, and I'm not sure even the Fed could print enough dollars quick enough to absorb it all. (though i think the major risk is that the government overvalues these assets when buying them from the banks, not undervaluing them)

Here's the major question we need to answer: is our current crisis a matter of the markets being too scared and confused to properly value these toxic assets or are they indeed as low and invaluable as the market is now implying (i.e. is the 20-30 cents on the dollar we're seeing many of these assets trade at the right price level, or is it way underestimating the true cash flow and overestimating the levels of default?)

If it's the former, then perhaps this private-public partnership will work as it will remove some of the frictions and uncertainties that are overwhelming our markets. Sure, the prices of the assets may ultimately be a bit distorted by the government intervention, but it will be worth it if we can remove them from our banking system and get them to trade at higher, fairer value prices.

If it's the latter case, however, I think in the end, assuming we don't want to see the vast majority of our citizens homeless and in dire financial straits, we pretty much have to assume that these toxic assets are part of our nation's balance sheet whether we like it or not, and it's more a matter of how and when we want to absorb them.

I'm not qualified enough to judge which is the case in our situation (though my gut says it's the latter), but it's a key question.

This is a good post. I'm not

Michael Wolraich — Sat, 21 Mar 2009 19:38:27 +0000

In reply to Public-private partnership proposal poses plenty of problems

This is a good post. I'm not sure that I disagree, but allow me to play devil's advocate. You write,

"The private companies - because they get all sorts of government breaks and incentives, including in many cases the assumption of losses should really big disaster strike - end up making decisions that do not properly assess risks vs. rewards."

Isn't that the point? Private companies don't believe that the toxic assets currently offer enough reward for the risk. But because there is a compelling public need to buy the assets, the government has to incentivize investors to buy something that they otherwise would not touch.

So the government component is clearly necessary, but what about the private side? I'm sure that DF would argue that the action should be wholly public, and it seems like you lean that way too. Again, I'm not sure that I disagree, but one benefit of the private component is that risk-reward is still a factor. An ineffective government official might substantially undervalue the assets to the taxpayers' detriment, but if he or she can't attract private investors, that suggests that the value is too low. So the private participation in effect keeps the government honest.