Sherlock Holmes, the brilliant detective who was invented by Arthur Conan Doyle while swatting flies in his clinic, made a very profound statement in one of his stories. He said – “when you have excluded the impossible, whatever remains, however improbable, must be the truth.” He drew a line between possibility and probability, thus stating the obvious. But, apparently, US Treasury Secretary Geithner hasn’t read Holmes. From Reuters-
Treasury secretary Timothy Geithner on Tuesday said difficulty in setting a value on banks’ toxic assets was a continuing hindrance to their ability to lend and borrow.
On this, Lucas Engelhardt of the Mises blog writes-
Apparently, Secretary Geithner has discovered that it is “hard” for the government to “set” the “value” of toxic assets. (Pardon my quotation marks.)
I’m sure he’s right, given that he’s simultaneously trying to:
1. Set the value so that the banks look solvent.
2. Set the value so that the assets can be sold without bank balance sheets deteriorating.
The problem, of course, is that establishing (2) requires that we value the
toxiclegacy assets according to what they can actually be sold for. Something economists like to call the market price. But, (1) requires that we value the toxiclegacy assets above the fair market prices. No force of will or “clever” policy can change that fact.
So, it seems that Geithner has realized that a task that is logically impossible is “difficult”. At least his understanding is moving in the right direction.
I am not sure I get Engelhardt’s point. Geithner requires that most banks are “solvent” after the toxic assets are removed from their balance sheets. He also requires that taxpayers are not being “swindled.” That’s what the whole “public-private” “partnership” is about. But the banks “are” insolvent if the assets are valued at “market price” – they will go kaput. So the assets will need to be valued at way above “market price” to keep them solvent. I guess that takes care of (1). But isn’t (2) (1) rephrased, or is it a “I am insolvent to the tune of 10 billion dollars, and I don’t want to go beyond that” statement?
Whatever it is, Geithner’s “plan” is impossible purely on the insolvency-swindle dichotomy. If he pays way over the “market price,” (it can’t be determined unless there “is” a market) the taxpayer is being swindled. If he pays less, the banks are insolvent. Not difficult, but impossible. He should either worry about the taxpayer, or about the banks, or simply leave the matter to the market which will then fix the problem in its own ruthless way – by bringing down a few thousand banks.
If we call Holmes’ statement Holmes’ Razor, then “For me, the impossible is merely ‘difficult’” would be Geithner’s Razor. He should be careful with it. Otherwise he might nick someone, or something.
I read the comments on the above blog post and found a link to this crazy idea by a top economist, who’s a … Keynesian. The only things that need “targeting” are such economists and the central banks. That’s why you shouldn’t trust the government, or its currency. But you can’t trust gold either – not because of any problems with value, but because of thieves like FDR who could throw you in jail if you didn’t surrender the gold. As long as you have a State, particularly the crooked one of present day, you are bound to be fucked either way. A funny but spot-on comment – “Hey Mankiw — how’d you like a negative salary this year?”