Toxic Assets, Toxic After All
That's according to a new study from Joshua D. Coval, a professor of Business Administration at Harvard, and Princeton economist Jakub W. Jurek.
Coval and Jurek write that the prices of toxic assets reflect fundamentals and that the low prices are not--as Geithner and Treasury argue--the result of "fire sales."
"Policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets," Coval and Jurek write, "are likely to only delay – and perhaps even worsen – the day of reckoning."
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Krugman and others have been arguing for a while that the mess the banks finds themselves in does not stem from a liquidity problem; as John Carney writes at Clusterstock, summarizing the Coval and Jurek paper,
"The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result."
That's right and Geithner and Treasury's misdiagnosis of the financial crisis will, as Coval and Jurek argue, only delay the day of reckoning.
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