This nonsense was in the New York Times this morning:
This crisis is unlikely to turn around until President Obama and his aides come up with a plan for failing banks that does not arbitrarily reject the idea of nationalization. They must also follow through on their housing plan to reverse the tide of unnecessary foreclosures.
The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.
The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.
This issue has dogged the system beginning with TARP; ‘how much is that worthless asset in the window?’
Nothing, Zero. Zilch. Nada. If the boneheads in charge of the various agencies knew how to do their jobs they would allow bankruptcy courts to have at these assets and be done with it! Watching these people trying to add two- plus- two- equals- five defines tragicomedy.
First of all, mortgages reflect the underlying value of tha assets at the time the loans were originated. This value was excessive becuause of monetary inflation. At the same time, the industry made a convincing argument that there was a shortage of good real estate in any given area (Florida, Las Vegas, California) and that ever- higher asset prices were a natural consequence.
Unfortunately, the shortage myth was just that; there is a structural oversupply of houses, both the size of houses and the number. Currently there are available millions and millions of houses; unsold and foreclosed houses are accumulating faster than second- tier speculators can purchase them in bulk. Out of this process, slums are created and additional houses are abandoned adding further to those already available.
The entire country is carpeted with houses; don’t believe me; Get onto a cross- country airplane flight and look out the window!
The foreclosures add inventory to the market constantly, which drives prices lower, which leads to lower values, which drives more forecloures in a vicious cycle. Housing is not liquid. The process of clearing the market is paced by the rate of inventory increase which makes the oversupply appear to be persistent. The persistent oversupply will continue to drive prices downwardl. This will take place regardless of the desires of Obama, the news media or the business establishment. Reasonably, the level would be that of unimproved land. Currently, there are houses in many markets in the US that can be had for $100. In New Orleans or Detroit or Cleveland or in many other areas a house can be had for less than $4- 5,000 for a acre which what good farmland sells for in Iowa.
Inflation does not represent real value, but is instead an inverse valuation of the debauched currency used to set its price.
The bank situation would be comic if the outcome did not lead to bankers, Congressmen and Treasury officials swinging by the neck from lampposts and tree branches. Problem is, the political system is broken, too. It is too compromised by wishful thinking and ideology.
Says Krugman:
This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.
What an awful mess.