Like a lot of folks, I’ve spent about a week trying to give myself a crash course into what, exactly, is going wrong with the financial sector so the best policy course of action can be pursued. This has mostly left me agreeing with just about every economist in the universe that the Treasury Department’s request for a blank check is a bad idea. Also, it has left me wondering where exactly Wall Street folks learned how to add and subtract, but that’s a another issue entirely.
One thing that does appear to be clear, though, is that one of the major issues in the financial sector appears to be that nobody knows how to properly price mortgage-related debt/securities/etc. Consequently, nobody knows which banks are solvent and which aren’t, which threatens to put a credit freeze over large swathes of the industry. So the bailout plan is, as I understand it, an attempt to prevent a credit freeze by buying up all the debt that nobody knows the value of.
So here’s my naive question: why is it better to write a $700 billion blank check for financial instrustments that nobody knows the value of rather than having the Fed or the Treasury spend $15 million to hire an independent accounting/auditing company to go through all of the mortgage related assets and figure out how to assign a value to them in a way that allows banks to know the price of their debt and, therefore, level of solvency?
This is an honest question that I don’t know the answer to. Why can’t we come up with a way to price these things quickly and avoid saddling taxpayers with this liability? Feel free to enlighten me on my economic ignorance in the comments.
