February 11, 2009

Economics Cat* Blogging

I will happily admit that economics isn't exactly my bag. But with other Toms getting into the act, I figure it's open season. Ezra Klein found a pithy characterization of the current state of the world financial system in Politico's Playbook. If this "oft-quoted investment banker" is to be believed, we now have a Schrödinger's Cat economy:
The problem is there are no sellers; that is, the banks won't sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That's what it means to be insolvent.
So. As long as we don't open the box, we're okay. Trying to "fix" the system will invariably involve opening the box and you know what that means for the cat. I guess that's why they call it a paradox. No wonder Geithner punted.

*Not my cat
Photo by Hannibal Poenaru used under CC license

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Anonymous Anonymous said...

The problem goes deeper. These assets are so toxic that there's no issue of anonymous sale. Since most of the believers think the market is undervaluing them -- most of the so-called toxic assets are toxic because of "non-performing performing assets" or mortgages that are current on payments but underwater and thus no one believes they will stay current. Many of the mortgage bankers believe that they will stay current, so they are holding them, but won't buy them at a price that reflects them staying current because their bosses would castrate them.

This means that putting a CDO up for sale is exposing weakness. CDO buyers will offer $0.25 on the dollar and then call the equities desk and start selling shorts on the company. We've seen (with Bear, Lehman) what can happen when the banks swarm against one of their own. It's not pretty and, over the last twelve months, we're one for three of the victim surviving.

Blogger Jill Richardson said...

Did somebody say cat?

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