scheme is inflationary, among other things. It is so because the
bank which has been loaded down by toxic mortgages and which is
currently worth, say, only 50% of its pre-collapse value, the help
from its share of the 1+ trillion scheme, would then be allowed to
eliminate those bad debts and float back to its previous value. Say,
it was worth 10 billions before the bubble and then it became 5. The
effect of making it worth 10 again, simply inflated its value by a
factor of 2. And that is your 100% inflation there. I know that
houses in some areas used to cost about 10,000 dollars 50 years ago
and they are now selling for one million dollars. Has the house
become more valuable?
No, it just means that the currency is worth more or less only a small
fraction of what it was worth then.
I agree with those saying that the market sentiment is only the
sentiment for the speculators who play Wall Street for the short term
gain, at the expense of the rest of the society in the long run.
Recall that the market was going up and up in the Bush administration
because of its easy money policy. The effect of it was to inflate the
prices of everything and the fools think that if the stock market says
it's ok for the day, then the country's economic condition is ok and
will be ok. No and no.
Fortunately, the US has the sucker Chinese economy to carry its
downside. China is riding a wild tiger because of its dependence on
the US consumer economy. Until China has its economic independence,
it'll be at risk and the US economic ills can be continuously delayed
or their deleterious effects substantially moderated by schemes such
as the current Obama-Geithner one.
But the US will experience inflation, no doubt. That will hurt the
little guys even as the investors can continue to cash in.
And in this light, my bet is that Krugman, Stieglitz, and other smart
economists aren't wrong in their more or less uniform and simultaneous
criticism of the politicians' fix, using only simple multiplicative
arithmetic to come to the inflation conclusion.
Again, don't forget, the market reaction is transient as opposed to
being a secular trend and its origin is localized to the interests of
the few who _have_ and want to take advantage of the scheme to make
even more, more selfish gain.
As to economist Michael Spence's assessment as pointed out by someone,
let me try to make some sense out of the discussion.
According to Bloomberg:
Two Nobel economists took directly opposing views of U.S. Treasury
Secretary Tim Geithner's new "toxic assets" plan released yesterday.
Bloomberg reported: "Treasury Secretary Timothy Geithner has a good
chance of succeeding with his plan to cleanse banks of toxic assets,
says A. Michael Spence, co-winner of the 2001 Nobel Prize in
. . .
Instead of financing the purchase of illiquid assets, the government
should guarantee many bank debts, take control of ``insolvent'' firms
and clean up their books, similar to what Sweden did in the 1990s,
While Spence, a Stanford professor and former business-school dean,
has more confidence in Geithner, even he isn't positive the Treasury
secretary can pull it off.
The Treasury plan ``is a little complex to implement,'', Spence
said. ``I assume the Treasury has done its homework, and has people
lined up'' to commit private capital to Geithner's public-private
partnerships, he said.
Stieglitz, speaking at a conference in Hong Kong today, said the plan
``risks a major increase in our national debt.''
``You can take the bad assets off the banks, but where are they going
to go?'' said Stieglitz, 66, who served as chairman of former
President Bill Clinton's Council of Economic Advisers. ``The one
place for them to go is to the taxpayers.''
Let's first notice that Spence made his disclaimers and hedged his
bet. Second, notice that Stieglitz's comment bypassed the question of
whether the banks with bad debts could be cleansed, which was what
Spence was talking about, and went straight to the overall consequence
of the Obama-Geithner political action.
In other words, the ``signal'' guru was only talking about cleansing
while avoiding the question of the overall consequence of the plan
while Stieglitz did the opposite.
Krugman, however, seemed to be saying that the plan's signal won't
have the desired filtering result either.
Ok, what are these signaling/filtering mumble jumble?
I am no economist but that doesn't mean that I cannot at least try to
understand what this important debate is all about. And I believe it
is important for every conscientious citizen to do likewise.
So, let's go to Wikipedia and see what it has to say about Michael
Michael Spence is probably most famous for his job-market signaling
model, which essentially triggered the enormous volume of literature
in this branch of contract theory. In this model, employees signal
their respective skills to employers by acquiring a certain degree of
education, which is costly to them. Employers will pay higher wages
to more educated employees, because they know that the proportion of
employees with high abilities is higher among the educated ones, as
it is less costly for them to acquire education than it is for
employees with low abilities. For the model to work, it is not even
necessary for education to have any intrinsic value if it can convey
information about the sender (employee) to the recipient (employer)
and if the signal is costly.
Now, I believe it is not for nothing' that Bloomberg went to Spence and
asked him for his opinion. It's not just because he has a Nobel
prize, which quite a few other living economists also have. So, his
signaling theory does have a role in the Obama-Geithner plan. The
next question is: How would his theory work for the current situation?
Well, my interpretation is this: We have another spectrum we want to
apply a filter to, by the dynamics of signaling.
But instead of making a high-pass filter as in the labor market, we
want to make a low-pass filter in the financial market.
In other words, Obama-Geithner wants to, instead of counting on the
smartest to float to the top for employers in the labor market to
scoop up, through the academic filter, find the least productive
industry of all, namely the collection industry, to lap up the scum
in the pond, so that the big banks like Wells Fargo and B of A could
instantly rid themselves of that part of their total assets that is
bad and magically returned to their former healthy selves, as if they
hadn't made any of those unrecoverable loans before.
In other words, with the heavy government subsidies and guarantees,
the collection agencies as ``dumb'' investors would be encouraged to
scoop up those big bad mistakes the big banks have made, institutions
which are deemed indispensable to our economic recovery (under the
credit-flowing-is-healthy-economics assumption that I have so strongly
criticized), aka our ``smart investors'', and which are presumed to be
too smart to be inclined to compete with the collection agencies for
the scum-lapping activity themselves.
It may work, as far as making Wells-Fargo and B of A return to their
former selves as Wall Street darlings again goes, as Spence said. But
then there are at least two not-so-desirable consequences, besides the
inflationary impact I have mentioned earlier, a very bad consequence
which is unfortunately a given.
(I) We will find collection agencies which previously occupied little
tiny offices on main streets suddenly taking up large spaces in the
skyscrapers in Manhattan. Bear in mind that these are the least
productive, and may even be the most counter-productive, institutions
in our society and they employ people with little abilities other than
making harassing phone calls. And they produce nothing of value. If
they are made to flourish in order to just perform a temporary fix on
our economy, they will be a dud which we will have a very hard time to
dismantle without causing a lot of unemployment again, for one thing.
(II) We might find that the Chinese from thousands of miles away are
buying up our unwanted real-estate (which is still something to them
because they are holding close to two trillion dollar worth of our
treasury notes which could be completely worthless in a short time).
And the situation would be kind'a like the labor-market outsourcing,
except that it would be the ownership of land of this country that we
are sending offshore.
Some people would say, hey why not? But if you see how hostile some
Americans are toward the foreign workers in this country, it's not
necessarily such a good thing to be so mixed up when there is so
little identification and trust between the different cultures.
All in all, I think that all the ramifications have not at all been
carefully considered when Obama committed our country to this fix,
which I don't thing is a solution.
Finally, does the Ph.D. example in the Spence signaling theory work
out well? For a while, yes. But if you look around today, somebody
from India who knows about programming Windows are deemed a lot more
valuable than a Ph.D. from our first-rate universities. And premier
computer maker Digital Equipment Corporation had to be swallowed by
the PC maker Compaq from Houston. When short-term profits drive the
stock market, our best disappears and we out-source our labor needs.
And so, the dynamic basis Mr. Spence banters about in economics to me
is quite ephemeral and therefore unreliable. The low-pass signaling
action of the current Obama-Geithner plan to bail out the economy has
the effect of further dooming our long term economic health....