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Frank Schnittger:
But if framing the problem as a market failure results in Governments thinking that all they have to do is to "restore the proper functioning of the markets" - through better regulation - then framing the problem as a failure of proper regulation doesn't result in any better solution.
But that's not what they're doing. "Restoring the proper funcitoning of the markets" to them means pouring money into failed institutions so that when they sell the bad assets at market prices they can remain solvent.

The market isn't clearing because the bans are insolvent. The "market failure" point of view is that the banks are insolvent because the market isn't clearing at the "right" price. So to repair the "market failure" they artificially prop up asset prices.

In so many words, you have chosen the wrong frame for your diary. It is not "market" failure and your solution is not a "market" solution.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 04:33:48 AM EST
[ Parent ]
Pouring trillions of taxpayers money into insolvent institutions to make them solvent again is explicitly an anti-market activity.  It is no different from a "socialist" propping up of "inefficient" state enterprises which cannot survive in an open market. (Ignoring for the moment the fact that such enterprises may also be fulfilling social rather than commercial mandates).  The market led approach is to simply let them fail and be replaced by other better structured, managed and regulated institutions.  

I am explicitly suggesting that toxic assets be purchased at current market prices - i.e. near zero in some cases - which will do nothing to help insolvent institutions but which will put a floor under further deflation and cut taxpayers in on the actions when market pricers recover.  The focus of "my rescue plan" is to to help the good banks/businesses vital to the functioning of the real economy which might be killed by the downstream effects of those insolvencies to remain in business.

I think we may be getting into a semantic squabble here.  I am partly using a market framing to get around the USA phobia of state intervention/ownership and also to avoid the taxpayer being stuck with almost unlimited liabilities.  I am also buying into Chris' more general thesis that the financial system as is is unrescuable and the focus now must be on finding ways to support the real economy which move away from dependency on "too big to fail" banks and from excessive debt financing in general.

Whichever way you look at it the future must move away from debt to equity, bond, and revenue sharing agreements as a way of funding productive enterprise.  Debt at the levels we have been operating is uninsurable because it is simply too vast and to removed from real productive economic activity.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 09:37:37 AM EST
[ Parent ]
Frank Schnittger:
I think we may be getting into a semantic squabble here.  I am partly using a market framing to get around the USA phobia of state intervention/ownership and also to avoid the taxpayer being stuck with almost unlimited liabilities.  I am also buying into Chris' more general thesis that the financial system as is is unrescuable and the focus now must be on finding ways to support the real economy which move away from dependency on "too big to fail" banks and from excessive debt financing in general.
Possibly. It's not the first time I am irked by a piece you geared to a different audience...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Mar 23rd, 2009 at 10:01:43 AM EST
[ Parent ]
Yea - my problem is I don't like preaching to the converted and prefer reaching to the convertable...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 23rd, 2009 at 10:13:55 AM EST
[ Parent ]

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