Thursday, September 25, 2008

Ecolonics 101

Up till now, I have refrained from blogging about the financial crisis, as I'm the first to admit that I've scarcely reached yellow-belt status in my econ-fu (h/t to Mike for introducing me to that most excellent term). As they say, better to remain silent and be thought a fool than to speak and remove all doubt.

But I've been doing some pretty extensive (for me, on econ matters, anyway) reading and watching and listening and thinking, and think it's time to dip in a toe. What I have been able to glean, in very general terms, is that the crux of the immediate issue before us is akin to a massive bowel obstruction in the viscera of our economy. Stay with me here. This blockage was created by the great mass of illiquid assets in the form of mortgage backed securities (MBS), themselves comprising masses of mortgages whose value has been allowed to become so ambiguous that they cannot be moved. All of the tottering financial edifices which have become so infiltrated by these inert clots stand to collapse, as credit markets cannot function without some reliable indices of value against which to borrow, and the underlying value of the mortgages within these MBSs has become quite impossible to ascertain.

These obstructions need to get flushed out. The Paulson plan, as I understand it, is to authorize the Treasury to purchase these MBSs and other bundled bales of bad mortgages at substantial discounts under the prices originally paid for them, and thus to extract them from the market, to be combed through and valued in some meaningful, transparent way. They could later be sold off in an orderly (and maybe even, in some cases, profitable) manner. This would, in theory, free the overall economy of the drag which they represent, and permit a stabilization of the marketplace through a gush of liquidity.

Now, given that the projected price tag for this enterprise looks to hover just south of a trillion dollars, it is understandable that there is pressure to craft the deal in such a way that there is oversight and transparency. This is as it should be. Where I think there could be real problems, though, is in further gumming up the works with all manner of provisos and caveats and additional conditions (like, say, tacking other forms of debt onto the buyout which, while they may also be troubled, do not contribute as centrally to the constipation of the system as do the dead mortgages the plan was crafted to excise). Those who seek to graft their pet porkers and populist projects onto these negotiations risk undermining what confidence there is in what is surely a perilous and unprecedented rescue plan. Perception is a key factor here, one which is reflected in the markets, and they have been making like the vomit comet as the wrangling has dragged on.

I am in no way advocating for undue haste and desperation in pushing this thing through. The whole thing offends my free-market sensibilities something fierce. The X-rays need to be pored over, and the treatment needs to be refined and streamlined (notably, the terms under which the treasury gets paid back need to be quite a bit more clear), lest it prove worse than the disease. But undue foot-dragging also has consequences which need to be assessed and mitigated. This is one reason why I doff my hat to John McCain for his canny, bold and responsible move to suspend his campaigning and possibly delay Friday's debate on foreign policy while he (and hopefully his opponents, since all three of these guys still have jobs to do as sitting senators) heads to DC to partake in the process. Sure, it'll bring a blizzard of presidential politics to the proceedings, but that could hardly be worse than the sorry spectacle we've seen so far. I daresay it might even provide a chance for the candidates to demonstrate a bit of leadership.

Care should, of course, be exercised, but further obstructionism will just as surely come back to bite those who commit it.

After all, the enemy of my enema is no friend.

(NOTE: Edited for clarity

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