mathgeek

The Detour Around Banking Disaster: How We Lost the Roadmap

Where is the part where they say that mortgage lending is too risky? Where do they predict a nationwide housing decline of 20%+?

Its easy to find people who said something that happened to be right after the fact... the trick is identifying who is saying the right things now.

The premise is that financial firms are currently insolvent. The question I ask is this: under what set of assumptions? If housing prices were to stabilize right now, I would guess very few if any are insolvent. If housing prices crash another 40% on a nationwide basis, pretty much every financial institution is insolvent.

Fundamentally, banks take short term, liquid funds and convert them into longer term, illiquid investments. It is a necessary feature of this role that short term, market pricing of long term illiquid investments will not correctly reflect their ultimate value.

The objective of government invention should be neither to protect nor to punish bank shareholders and executives... rather, the role should be to allow bank investments to play out over their natural time frames and prevent panic liquidations. The TARP program, implemented correctly, could acheive these objectives.