Nationalization versus the market

Allowing free entry into securities dealings and thus allowing creation of markets for bank loans alleviates the “mark to market” problem. Banks say they don’t know what values to place on their bad loans. Markets provide valuation information.

On the other side of the bank loans are the borrowers. The personal debts need to be worked out. If the banks won’t do this on their own, then when they sell these loans, the new owners will work them out with the borrowers involved. By having real markets in these loans, the new buyers can bid a price that allows for the costs of renegotiating these bad loans and working them out. Owners of property can bid on their own loans in a free market. The market thus alleviates the personal debt problem too.

Treasury bailouts are the worst solution, as the government replaces the market and the multiple potential bidders: this is nationalization. This creates new debts that taxpayers then have to pay at the bubble prices, or else the Treasury forces loan sales at prices of its choosing, or else negotiates prices that help banks and harm taxpayers. There is no valid price discovery in this procedure, and it is inflationary to boot.

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4:47 am on November 29, 2008