Valuing Toxic Assets
The guiding principle behind the Geithner plan is, as Paul Krugman noted yesterday,
"that we’re looking at an unnecessary panic. The housing bust, so the story goes, has spooked the public, and made people nervous about banks. In response, banks have pulled back, which has led to ridiculously low prices for assets, which makes banks look even weaker, forcing them to pull back even more..and if we can get the market in troubled assets going, people will see that things aren’t really that bad...the vicious circles will turn into virtuous circles."
I'm a layman with no economics background but I have followed the housing boom and bust pretty closely and I think that Geithner's plan is guided by an unreasonably optimistic view of the value of toxic assets, particularly housing.
Consider the following: [More...]
Unemployment in states already hard hit by the housing bust is getting much, much worse. Indeed, in California the unemployment rate is expected to hit twelve percent.
The supply of homes is still very high.
The ratio of the price of housing to household income is falling but, as Calculated Risk noted in February, though "We are getting closer on prices, but it appears we still have a ways to go...One thing is pretty certain - as long as inventory levels are elevated, prices will continue to decline. And right now inventory levels of existing homes (especially distressed properties) are still near all time highs."
So even though housing prices have declined substantially we still have a long ways to go in price declines and indeed a fast-worsening unemployment situation will only drive down prices further. How then, as Geithner seems to be arguing, do we have an unrealistically negative view of toxic assets?
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