The Geithner Interview

I finally got around to listening to Tim Geithner’s interview with Adam Davidson for Planet Money. (Simon already commented on it.) I had two main reactions.

1. Around the 14:30 mark, in response to a question about the problem of valuing bank assets, Geither said this:

If somebody asks you, “what’s your home worth today?,” your answer to that question would be dependent on whether you had to sell it today, or you were planning to sell it in three years . . . or you were planning to sell it in ten years . . . So that basic challenge of trying to figure out what your home is worth, or what any asset is worth, depends a lot on how long are you’re going to hold it, and it depends a lot on whether there’s going to be financing available to people out there who might buy it. And in the absence of financing, if you had to sell it today, it would be worth a fraction of its basic value. Now, what’s happening in our market today is that we have just a broad shortage of financing available. And what the government needs to do in that context . . . is to try to make sure that the government and the central bank together can provide the financing to help get those markets working. And that will make it more likely that these assets are worth and will have the value that is their basic inherent economic value rather than an artificially depressed value that reflects the absence of financing and credit.

Yes, someday the economy will start to recover. And yes, someday it will be easier to get a mortgage (although it should be noted that mortgage rates are historically low right now, so mortgage rates will probably be higher in the future). When the economy starts to recover, housing prices will start going up. But we have no idea where the bottom will be, and so there is no assurance that even in ten years you will be able to sell your house for more than you paid for it. There isn’t even any assurance that you will be able to sell your house for more than it is worth now. If, as some people believe, housing prices still have another 20% to fall, it could take ten years to make that up. And there are some people who argue that, in the absence of increasing population density, there is no reason for real housing prices to go up at all.

The idea that houses have a “basic inherent economic value” other than the prices they can fetch in the housing market is, I think, a fallacy. And so the idea that therefore houses will naturally return to some “basic inherent economic value” that is higher than current market prices is, I think, wishful thinking of the kind that has hampered responses to this crisis from the beginning. They could; but they could just as well not.

2. Near the end, when Adam Davidson was trying to get Geithner to say something, anything, about nationalization, he said this:

It’s not the right strategy for our country for basic practical reasons that our system will be stronger if it remains in private hands with support from the government to make sure those institutions can play their critical role going forward.

I listened to the end but I didn’t hear any “basic practical reasons.” To be blunt, it sounded like the “private is better” mantra we heard from the Bush administration, and (to a slightly less extent) the Clinton administration before them. Sure, most people agree you don’t want all individual lending decisions being made by bureaucrats in Washington, but that’s just a straw man. There are valid reasons to debate whether nationalization is the best solution; in particular, if you were to take over Citigroup, even for a short period of time, would that immediately weaken Bank of America so much that you would be forced to take it over the next day? And what about JPMorgan Chase? But that’s not what Geithner said. He said “private is better.”

Now, maybe that’s just because Tim Geithner doesn’t want to get into a serious debate about the merits of government takeovers on national radio, because he’s afraid of the impact that might have on the markets. I respect that. But let’s hope that when they have these debates in private, they don’t just write “private is better” on the whiteboard and call it a meeting.

64 responses to “The Geithner Interview

  1. I also don’t want assets to have the “artificially depressed value” that Geithner was referring to. However, neither should they have the artificially inflated value they have had in recent years.

    So I still think it comes down to lending practices by banks and their agents: they must lock down the ratio between salaries and mortgage sizes, to a sensible multiple of verified long-term income: say 4x max. Then we’ll see what houses are really worth.

  2. “Artificially depressed” is hardly an accurate description for what is happening. Housing prices rocketed so far beyond most people’s wages that the only way most could afford these bloated sacks of masonry was through the creation of absurd lending vehicles that all but guaranteed financial meltdown in the short run. We NEED the shrinkage of these overblown prices if we are ever going to get back to a time when wages and housing had some realistic ratio to each other. What I fear is that people like Geithner may believe that propping up those absurd housing prices is the appropriate response. If so, we can look forward in the future to more of the same misery the Greenspan cohort has already visited on us.

  3. Simon and James:

    I am a regular reader of this website since it’s launched and this is simply great.

    One thing I haven’t been able to understand what actions government can take by doing “full nationalization” (with existing common wipeout) that it can’t take right now with “assuming” 36% of stake in Citi or more than 80% in AIG?

    I am not sure how the restructuring will be easier in case 100% of banks is taken under govt control? Could you please share your thoughts on this?

  4. Great post, James. So many of us are hoping that Geithner et al are saying one thing but privately thinking something else. It’s getting harder and harder to think that.

  5. Anytime I hear “inherent value” in an economic or market context, I step away. There is no such thing; the only value of a good or service is what the market puts on it. That value may or may not be “rational”, but it is real.

    Never, ever believe anyone who says anything has an “inherent value.” It’s a sales pitch, not an assessment.

  6. There was a time when “affordable housing” was actually an integral part of many politicians’ platform; what a strange place we have arrived at where the principle has been turned completely on its head. Now the government seems to be doing all that it can to prop UP home values, and maintain them unaffordable.

    It would appear that earlier policy has enlarged the home owning minority enough to make this politically feasible. On the rare occasions that we hear from the crowds of young professionals – 20′s, 30′s, some 40′s – who couldn’t dream of purchasing property at these prices, it doesn’t resonate. In today’s pay for play system, they are completely disenfranchised, though they are the minority.

    I looked in amazement at many of my peers earning $90K purchased homes worth $700K, $800K. With few exceptions, every buyer had a windfall profit from a savvy – or perhaps simply lucky – equity investment, or an early inheritance from wealthy parents. Perpetual rent seemed to the fate of those without such good fortune.

    And now that a market correction of vast momentum is returning the market value of homes to the net present value of future cash flows – i.e., rent – which is the value they should have commanded all along… both the outgoing and incoming administrations continue to do all they can to oppose market forces, all under the sanctimonious rubric of saving the poor, victimized homeowner.

    I’d invite those of you who haven’t traveled to the old world, or the raw capitalist societies to our South, where two and three generations of “family loving” peoples inhabit the same home forever… to do so and reflect on what kind of society the US is becoming.

    We don’t need an activist government: just one capable of respecting contracts and budgets, things we are all expected to do at 18.

    (BTW, I am a home owner… so I suppose I am arguing against my own interests. But I see my interests as broader than tallying up an all time high net worth measured in a fiat currency: I’d like to avoid living in a society where home ownership is restricted to the wealthiest.)

  7. Just what I have been afraid of: the zombies are having the upper hand and poor Tim Geithner apparently becoming a reincarnation of Mr. Micawber: “something will turn up…”

  8. The case against nationalization is not completely ideological. There actually are *practical* reasons why such a course is seriously problematic. These were spelled out in the Planet Money Podcast on Friday by William Issac, and also in his 2/24 Opinion Piece in the Wall Street Journal.

    http://online.wsj.com/article/SB123543631794154467.html

  9. if the question is “what’s your home worth today?” doesn’t the answer have to be based on today’s value – not in 5 or 10 years – if geithner’s answer to his question may indicate a fundamental flaw in the way he looks at asset valuations as he is also not considering any, let alone a broader range of ownership costs which could accumulate in the 5 and 10 year period he suggests – or any context as to whether the home is in districts which will be more vulnerable to foreclosure, tax increases, inflation and the destruction of local economic engines.

  10. “Now, what’s happening in our market today is that we have just a broad shortage of financing available. And what the government needs to do in that context . . . is to try to make sure that the government and the central bank together can provide the financing to help get those markets working. And that will make it more likely that these assets are worth and will have the value that is their basic inherent economic value rather than an artificially depressed value that reflects the absence of financing and credit.”

    What a manipulative lie!

    The shortage of financing is due to the fact that financing was excessive for years. Financing = credit. There was an incentive to give too much credit given to too many people and businesses because debt was turned into an asset! This excessive allowance of credit was unsustainable in the long term and eventually caused the economy to collapse. You can’t escape this, and you won’t escape it if you do it again, except the next time it will take half the time for the bubble to pop than it last did because of the “learned” principle (it will be easier to recognize bad moves for what they are, and people will jump out of the game sooner).

    Now he is saying tax payers should fill the role of that the financial institutions could not occupy themselves without breaking down.

    Geithner has a short-term goal in mind. It is found in the quote above. His one and only goal is to bring the value of the assets back up. It isn’t to repair the economy. It is all about getting the value of the assets up. Geithner is just trying to save the investment of people he is dedicated to.

    The economy cannot recover with recapitalization. Only by seeking to eliminate the trade deficit can jobs be created and loans resume again, GOOD loans that will not destroy the economy after a few years.

    For every American that lost his job, a few Chinese got a job.

    For every American that lost his job, a few Chinese lost their jobs.

    This completely contradictory process was only sustainable by the allowance of massive credit, which kept the jobless American’s purchasing power artificially high for a certain period of time, until his debt enlarged beyond sustainable proportions.

    This is the root cause of the crisis, and it is not being addressed in any way whatsoever.

    Chinese domestic demand must go up, which means the yuan must go up, and salaries must go up.

    The ONLY permanent way out of this crisis is a grea balancing act between China and the US. There is absolutely no other way out of this.

    When jobs are created once more in the US as a result of higher salaries in China and a higher Yuan, lending can resume. Until then, it will lead us right back into the same place we are today, but with a debt that will have reached its peak, and no actions will be possible anymore.

    The cheap goods were never affordable to begin with. The US and China must understand this.

  11. what really bothers me about the ‘private’ vs. ‘nationalized’ meme is that it ignores the fact these entities are supposed to be ‘publicly’ owned by presumably tax paying bond and shareholders who, before the days of mutual funds, etfs and pension funds actually knew what they owned and had a vote – and having lost their votes and having been relegated to minority status, are now being asked to bear the greatest burden of both the losses and taxes – how are they to pay taxes when their jobs, pensions and the equity in their homes are all wiped out?

    that having spent years eroding shareholder rights, we are now being prepared for the death of the public corporation and provided with 2 enormously ambiguous options – ‘national’ or (publicly assisted) ‘private’. the 3rd option also being discussed but rarely within the context of the private vs. national debate being ‘foreign’.

    so back to the most recent Citi deal – what are we to make of this definition of:

    “….["private investors"], a group that, according to a Citi statement, includes Capital Research Global Investors and Capital World Investors (two funds under the same umbrella), the Government of Singapore Investment Corporation (Singapore’s sovereign wealth fund) and the Saudi prince Alwaleed bin Talal (at one point the largest individual shareholder in Citi). The Kuwait Investment Authority also plans to participate in the exchange…”

    and is it at all possible that the ‘nationalization’ option may include controlling stakes taken by, or given to ‘foreign’ governments?

  12. Something else to consider. . .the acceleration of home building in the bubble had a major effect on the price of resources — LIMITED RESOURCES — (OIL, and in turn everything else that requires energy to create anything)which exacerbated the costliness of homes in general. Now that oil is back down to pre-bubble cost so are the homes. But in the future when we eventually see growth again, oil will rise and so will the cost of materials.

    I guess my point is that no one seems to factor in the cost of energy relative to the value of homes now and in the future. So how can we accurately value a home if it doesn’t reflect the TRUE energy cost which will surely rise in the future market?

    Or does it not matter?

    There are so many variables, my head spinning.

  13. also…I listened to the planetmoney on friday and then this american life on saturday and from what TAL implied, is that Geithner is the fall guy; we are going to nationalize, but not until every loose end that can be tied is, and not until we have the people power in place to restructure these banks. I heard it could be in the thousands.

    It’s a head fake, IOW. Geithner is going to take the heat when they “change their minds”.
    I want to believe this a rope-a-dope Obama plan, I find it hard to accept that Obama isn’t calling the shots and isn’t entirely aware of the magnitude and multitude of the problems of the variables. If he is, I will return to my cynical self and go live in a cave or something.

  14. “our system will be stronger if it remains in private hands with support from the government to make sure those institutions can play their critical role going forward.”

    If the taxpayers end up losing hundreds of billions or even a trillion dollars on these bailouts, this statement might well come to be seen as deluded or comical. I don’t think that people see the downside of these hybrid plans if they don’t work out and unemployment goes up and up. It won’t be seen as money well spent. I’m seeing a really nasty contagion at that point, and it won’t be towards “free markets”, whatever that means nowadays.

  15. padmatweeter

    I still think 3 actions will go a long way to get flow of money going:
    1. Force cramdown of mortgages (start with ARMs that have or will kick into higher rates). Just lowering interest rates isn’t enough and probably detrimental in the long run. Housing prices should fall – they’re too high now.
    2. Annul ALL credit default swaps – pay the premium back to the buyers. Pass laws that make these derivatives illegal, specifically, now. Work on understanding other derivatives later, and pass laws about those, too. Better yet, force SEC to do its job!
    3. Go back to the $350 billion already spent – how did banks or whoever we gave it to use it? Take some of it back and lend it to businesses outside banking that really need the money – auto companies, other manufacturing, businesses that can’t get loans but have good credit. Let them make some rain.

  16. While I appreciate Adam interviewing Tim Geithner, I thought he could have improved the interview by including a guest co-interviewer that possesses the specific education and experience to understand the issues at a very high level. That will help him pin down more specific answers from the Treasury Secretary. Someone needs to be able to word questions with enough technical specificity so that Mr. Geithner has to provide more useful information instead of vague, general government-speak answers. Maybe have James or Simon assist with the interview so it is harder for the Treasury Secretary to dance away from answering the questions. Adam would ensure that the interview does not get bogged down in technicalities and James or Simon would make sure that the answers are more concrete.

  17. Good luck trying to find a cave that isn’t already stuffed full of people. Caves and fallout shelters are the only real estate with rising demand these days.

  18. @snake

    You are 100% correct. The fundamental issue is lack of purchasing power in the US, that was sustained too long by debt. This crisis was triggered by the banks, but has spiraled out of control because of the sudden realization that debt was unsustainable and that demand _needed_ to contract.

    The immediate problem – the credit crisis – was addressed last October and November. The financial system is not in immediate threat. Banks are loaning, when they can find lenders with sufficient collateral and dependable income streams (which are increasingly rare), and meanwhile the few borrowers who are in that position do not want to borrow.

    As to why banks are not lending more, well… Would you if you were a bank? Just last week, the SBA announced that the SBA loan failure rate was 12%…

    http://money.cnn.com/2009/02/25/smallbusiness/smallbiz_loan_defaults_soar.smb/index.htm

    Ahem. 12%. So, if you were a bank (not backed by the Fed), you would need a _massive_ interest rate to cover losses due to a 12% bank failure rate, or you would need the business to post a lot of collateral (and if small business had that much collateral, they wouldn’t need the loan). This is part of what we mean by a “liquidity trap”.

    Even if the govt. gets the loans out and puts small business on life support, unless the economy BOOMs in 2010, those small businesses will spend years trying to pay down that debt (and in doing so, holding off hires and other investments right as the govt starts capping the deficit). The consumer debt load will be transferred to small businesses, which will then have a pernicious long term effect on the economy.

    The sheer blindness displayed by Team Obama continues to stagger me – and you are correct, Geithner is embroiled in bold face lying. I do not believe for a second that he truly thinks current govt. action is sufficient. His hope – and it’s a hope because it is not grounded in any evidence – is that if he convinces enough people that the financial rescue is going to work, then it might become self-fulfilling.

    Sadly, Geithner is just not very persuasive, and exactly the opposite is happening. The sudden market collapse after Geithner’s interview on the bank “plan” kicked off the second phase of this crisis. Investors worldwide realized that Team Obama – which had been talking up “bold” action – simply did not have a clue.

    As to China, they are not going to magically increase domestic consumption. If anything, the Chinese are far more capable of hunkering down and reducing consumption than people in the US. They are barely one generation out of true poverty. Nor is the Chinese government going to disgorge its massive currency reserves without good cause.

    So the fundamental, really deep issue is the currency.

    And the agencies which have control of the currency – the Fed and the ECB – have strong personal and academic incentives to stop inflation at all costs. Otherwise, their reputations are shot.

    It took a long time for me to realize this – as well as to realize that Bernanke’s threat to purchase T-bills is one that he desperately hopes not to use. So desperately that things will have to get _really_ bad before he deploys it (and he does not believe things are that bad, compared to the 1930s). He’s hoping that the mere threat would prevent deflation, but as events have spiraled out of control and he has consistently shown an unwillingness to use his weapons on behalf of the broader economy, the threat becomes less powerful. (On the other hand, he’s shown a willingness to do anything necessary to save the banks.)

    Bernanke would much rather that the US Govt. goes vastly deeper into debt (and has consistently argued the US Govt. should spend more and spend faster) than be the guy whose name gets attached to inflation in all the Macro Econ textbooks for the next 50 years.

    Thus, the US is not inflating, and therefore not forcing China to alter the exchange rate (keeping the Yuan way overvalued), and therefore China has no incentive to spend down its reserves. The Chinese govt., like its citizens, clutch their security blanket. (And who can blame them?)

    Even if the huge US govt. stimulus does work (which it may temporarily), it is likely to merely stabilize the economy at a flat level (L-shaped “recovery”). This is because private capital and consumers will look at the currently unsustainable levels of debt and the necessary govt. cuts starting in only 2 years, and limit future investments because they know the “rebound” will be only temporary since the spending _cannot_ be sustained. Witness the “stop and go” response to govt. stimulus in the 1930s in the US and the 1990s in Japan. Every time things started looking up (in both decades) the govt. started trimming its outlays, and the crisis imploded again. Remember, the 1930s actually had TWO depressions, with a mini-recovery in between.

    Team Obama is optimistic to the point of incredulity. NO ONE else in the world believes their current plans will work to restart a positive feedback loop in the global economy. Investors and consumers must perceive a sustainable advance (which means there must be sustainable fundamentals), or they will require permanent government life support.

    So as I watch all of this, I find myself agreeing strongly with Obama’s long term agenda, but very saddened at the general macro policy. My fear is that his macro failures are going to trump his domestic policy gains in 2012, and we will see retrenchment. The US population is simply not that patient.

    The ONLY solution is to restore balance and spending power, and this can happen in one of two ways (have said this many times):

    1) Pay back debt (ahem, should have done this 20 years ago – but it’s too late now; if the US govt and US consumers all try to pay back debt, we’ll have a massive contraction; US national tax income will fall faster than we can repay the debt because the servicing costs are so large and taxpayers are so poor; the US will go bankrupt)

    This is the option Team Obama seems to be gunning for. Spend like made, hold interest rates low, do NOT inflate, then tighten the belt rapidly in 2011 and start paying debt down while the economy magically continues to grow at 3.4%. So, do any of YOU believe that will happen?

    And if none of YOU believe it, what do you think investors believe? Which mean they will hoard capital.

    Ultimately – either in the short term or the long term – the US government will go bankrupt while trying to keep the system afloat as long as possible.

    If the conservatives get their way, we will see vast swaths of US businesses and households go bankrupt. If Team Obama gets its way, we’ll stave this off a bit longer until the country goes under.

    2) Inflate the currency… devalue all debt, devalue US dollars that are held by foreign governments (forcing them to spend or lose it), devalue T-bills, and force investors to put their money to work to avoid inflation-losses. This is the only option that will avoid bankruptcy.

    However, it will incur higher interest rates for a potentially long time.

    So choose your poisons.

    IMO, I think Team Obama will plug along, borrowing more and more money from abroad to support its 1.7 trillion deficits until eventually foreign lenders get worried, then we will see a massive run on the dollar because Bernanke will be FORCED to buy up T-bills (rather than doing so voluntarily). The panic that will ensue after that will prove difficult or impossible to manage.

    As Dornbush said, it always takes longer than you think, then happens faster than you can imagine.

    Oh, here’s a blast from the past (1999):

    http://www.epi.org/publications/entry/briefingpapers_debtbomb/

    It’s not like we didn’t see this coming a decade ago.

    In other words, adjust the currency now, or pay a vastly worse penalty in a few years.

    Ideally, the currency adjustment would be “managed” so investors don’t get spooked and take down the whole system.

    So, I’m mostly just sad because I think disaster is almost inevitable.

    What I would give for 5 minutes to try to make this argument to Obama without his economic goon squad stepping over themselves to explain why the “key” to whole problem is the banks.

    5 minutes of common sense vs. 30 years of contorted economic theory. I wonder which wins?

  19. I keep waiting for fresh thinking and have been disappointed thus far.

    If everyone keeps saying we’ve never been here before and these are unchartered waters, then so be it.

    That in turn leads one to think we need to do things we’ve never done before and plow through these unchartered waters with a new dinghy.

  20. Obviously, Geithner is in the “save the banks to save the creditors” camp. Most economists and pundits seem content to limit themselves to the agenda the administration has set. Baseline Scenario and Michael Hudson seem to be the exceptions. Simon Johnson raised the point that you can’t solve the problem unless you get rid of the people who were deeply involved in creating it. And Michael Hudson claims the problem will not be solved until we force the writing down of bad debts instead of shielding creditors. I haven’t seen any criticism of Hudson’s point. Is he right or is Geithner right. What is Baseline Scenario’s take on Hudson’s claims?

    Here are some links to Hudson’s claims.

    http://www.youtube.com/user/RenegadeEconomist?gl=GB&hl=en-GB

    http://www.michael-hudson.com/

  21. This is a very good question. In my opinion, the additional thing the government should be able to do is force writedowns of these assets that most people think are being booked at artificially high values. One way to do that would be to simply move the toxic assets off the bank balance sheet into a new government entity, and then supply enough capital from the government to make the bank solvent again. Yes, this would cost money, but I don’t think there’s a free lunch available.

    The curious thing is that this has very little to do with government share ownership. The government has 80% of the equity in AIG, yet has not taken this step. And the government doesn’t even need 51%, because it can already do this under its regulatory authority if it believes a bank is insolvent. (I acknowledge that it would be more complicated with Citigroup than with a smaller bank like IndyMac.) So I think this magical 50% barrier is a red herring.

  22. James,

    Can you be of any help on this:

    “So with last week’s Citigroup/US Gov’t announcement that already has Mexican officialdom and opposition politicos smelling blood, it’s worth noting how Pandit recently split C into two parts, namely Citi Holdings (all the bad stuff) and Citicorp (all the retail banking things that are profitable and everyone likes, including Banamex).

    So here’s the question that’s been itching at me all weekend: Do Citigroup’s intentions regarding Banamex signal that the US Gov’t is only (or majority) buying into Citi Holdings, the toxic end of C? ”

    http://incakolanews.blogspot.com/2009/03/citigroup-and-banamex-theres-fight.html

    I found this post interesting, since it seems to me that we’re giving money to Citi in order to keep Banamex, which could bring in $15 Billion Dollars.

  23. with all due respect, if Simon might be asked to defend what may be perceived as a biased view of the participants who created the problem, and the ease or feasibility with which they can be ‘taken out’, for lack of a better term. one case in point may be the allegedly huge retention bonuses being paid to those with the working knowledge to engage in any number of wind-downs and restructurings.

    agree on the importance of the FX problem, but believe it is much more complex than china/u.s., optimal balance/value, based on the prevailing version of BWII…

    and it sounds like the free lunches are still available as management slash dividends, fire staff and write down ‘toxic assets’ while continuing to award themselves relatively massive compensation and severance packages – even if capped or reduced.

    the disturbing, undoubtedly distorted view from here being that the situation may be working only too well for geithner et al. and their private clients and that impressions of ‘their’ ideas of a fix don’t sound at all like ‘free markets’, except perhaps for them.

    question – might GE be a good company/bad bank candidate? what continues to provide relative support to its’ share price and (now reduced) dividend? Yes, the total loss of market cap is massive, but the share price seems to have held in line with the decline of many of its dow non-financials classified peers.

  24. At this moment for the people who are able to pay their mortgages …they shall give thanks and praises to the almighty…..and focus on their jobs and how to make a contribution to the society…..Home values recovery is wishful thinking….. If that happen Good but if don’t happen at least people on the low-end of the income distribution may be able in a near future to buy a big house for a very attractive price….I am positive that other instruments for buying assets that increase in value overtime will be create and will cause less harm to the society..…like for example investing in a portfolio of companies that in one way or the other eliminate out pollution from the environment.

  25. That won’t do it either. We’re dealing with fraud on a massive scale at every step in the process:

    http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html

    Markets never clear when fraud is the primary reason for the inflation of asset values.

  26. I think Geithner is using the home price question as a metaphor for why he doesn’t want to force banks to liquidate in the current climate: like borrowers underwater, they too would be forced to sell themselves short, so he’s trying to hold off “selling the house”, hoping prices go up later.

    I think houses do have two kinds of inherent monetary value (aside from use value). One is the rent value: if a rentier can buy a house and then rent it out for 5% interest per annum after expenses, then that is a reasonable gauge of what the sale price might be. (In former times, the rentier was also counting on real estate price inflation; now deflation is the worry.) Two is replacement value: it costs some ponderable amount of money to build a house from scratch in a given location. So this should be a fair gauge as well, while taking depreciation into account. Of course, labor prices are probably declining steeply right now; materials too perhaps. Naturally, risks inhere in either of these valuations, but should we believe that these risks overthrow all rationality? Who knows, maybe right now they do…

    By the way, these two kinds of valuation — rentier and replacement value — apply to the inherent monetary value of banks as well: is a bank worth 5% interest per annum after expenses, and what would it cost to build a new banking system from scratch?

    These last two thoughts beg the question: Who is to be the agent who “builds” or “owns” a banking system? Put another way, is banking a private, social, or public function? Are we in the process of discovering that the most important function of banking is neither private nor public, but social –like education and health care?

  27. Charles R. Williams

    I think Stefan has it right about Geithner trying to make a point about bank assets. What he says about the price of houses and the availability of financing for home buyers makes no sense.

    The price of houses is still too high. There is plenty of mortgage money available for creditworthy borrowers. Everything governments are doing to forestall foreclosures is delaying the necessary housing market adjustments.

    The situation is very different with troubled assets where circumstances are forcing the logical owners of these assets – those in the best position to get the most value out of them – to dump them into a very thin market at fire sale prices. That is why the best solution is to restructure the liability side of the banks’ balance sheets by converting unsecured debt into equity and wiping out the stockholders. The troubled assets can stay where they are once the banks are made solvent.

  28. I think Stefan makes some interesting points regarding inherent economic value of a home. I would only add that I don’t think Geithner is repudiating the idea that functioning markets best reflect the inherent value of an asset, so much as asserting that the current housing market is dysfunctional, due to the lack of credit. If people would be willing to pay $1 million for my house if they could just get qualified for a mortgage, but right now banks aren’t lending out for them to buy my house, what is my house worth today? Arguably, it’s worth whatever somebody who can get financing would pay for it, but we know there are willing buyers who would pay more if they had access to financing. Just so, I think Geithner is saying that we need to get banks lending and credit restored so that my home’s value reflects the value represented by willing buyers with ordinary access to credit. I would not describe this value as the fundamental inherent value (a poor choice of words in my book) so much as the fair market value in a properly functioning market with ordinary access to financing.

  29. one kid is our=\\
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  30. What something is worth is the price that it can be sold for now. Simple. In stressful times, things have lower value. Globally, we are going to be deleveraging and that means prices will go lower because capital cannot be multiplied by financial counterparties to support rising values. Geithner, thus has his head up his ass.

  31. i also believe that house prices will back to their basic value, but don’t know when.

  32. ist this party over yet.?house prices will be norm when it’s right…..really i’ve seen some very intellectual insight here but you are not the number one….it’s out of your hands

  33. please keep talking though….it’s pretty much destiny from this piont

  34. god is within the two year old…..please keep safe…

  35. let your kids type on th ekeyboad…..you might learn some thing

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  37. Here is a really good statistical study of past financial crisis around the globe.

    http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

    While we cannot say where the bottom is with precision. I think we can have a good statistical sense of where things will likely end up. Anyway, this is a good read and it covers stock market, housing, employment and etc.

  38. Fraud occurred? No! You don’t say?

    Yes, it did, and I was thinking specifically of mis-sold mortgages as a starting point. Mortgages where the sales agent (whether a bank or independent agent) lied about the applicant’s income or status, so that the mortgage could be granted. That’s what I mean by “lock down” i.e. enforce the income requirements, with legal consequences if you don’t.

    Think about what would have happened if all those sub-prime mortgages had never been issued in the first place. House prices would not have shot up, putting pressure on lenders to relax their standards further. (Remember, houses are priced at what people are willing AND ABLE to pay, and sub-prime mortgages were the great “enabler” of the housing bubble.)

    Those loans would not have been collateralized in to CDOs and other toxic assets. You might still have had the CDS problem, but one of the roots of the current crisis would not exist, had banks maintained their lending standards. Look back over the last few years – or look at the current headlines about the plans to make US Banking “more like Canada”. Your neighbour to the North is a country where lending standards were enforced, and is now the model your new President is looking to. http://www.nytimes.com/2009/02/28/opinion/28tedesco.html?ref=opinion

    Yes, you had the likes of Maddox and Stanford, and but those frauds aren’t at the root of the current crisis.

  39. The following NPR interview really reaffirms my concern about nationalization. It is an interview of someone who has went through the only time that has ever happened before for a large bank.

    http://www.npr.org/blogs/money/2009/02/hear_he_nationalized_a_bank.html

    I am a software engineer. One of the problem I face on the job is the issue of “scalability”. For example, a design that works well for a small website will most likely NOT work for the likes of google or yahoo. Often solutions for small problems don’t work for large problems.

    From what I gathered, FDIC has a lot of experience with small local bank failures. The interviewee raised really valid points about the viability of doing the same for a large bank like citibank. I very much share the interviewee’s concern.

    Also, I’ve repeatly heard the argument that unless we fire all management that made the mistake in the first place, the banks will become zombie banks and make stupid decisions. However, what guarantee new manager will make good decisions? I think this is still a policy and oversight issue. New vs. orig managers seems to be separate matter.

  40. Dittos to you Terry. I felt like I had been punched in the gut when I read this Geithner quote about the inherent value of houses. My wife and I have for years made fun of people (mostly real estate agents) who spout the “inherent value” theory because to us its a sign that a person isn’t very savvy about the world and is a chump who is going to make a lot of dumb choices. Now one of those people is our Treasury Secretary and in charge of fixing our nation’s biggest financial crisis in decades.

  41. I subscribe to the Heisenberg uncertainty principle of asset valuation: It is not possible to value an asset without selling it. Just like with the real Heisenberg uncertainty principle the value of an asset is just a probability cloud at any given point in time. The only way to measure the value of the asset is by actually selling it.

  42. I was just talking to a mortgage broker two weeks ago, and he said people with good credit were having no problems getting mortgages at good rates. I guess Geithner wants to get us back to the point where we are giving mortgages to people with poor credit?

  43. Geithner seems to be a well-educated person. But, how long do you think he would last in a “Spelling Bee” competition, especially when asked to spell “T-A-X–C-H-E-A-T?

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  45. Fred X. Quimby

    I never imagined “death by paper cuts” would be a recommended course of action!

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  47. Is the question, “What’s your home worth today?” really indicative of the current market value? Isn’t the determination of what homes are really worth, “What would you sell your home for today?” With of course some measure of the respondents holding power.

  48. It’s starting to feel like a debate about the meaning of religious scriptures. Was Geitner talking about the inherent value of actual houses, or was he using that as an analogy for the value of financial assets.

    In any case, Geitner is correct that value is inseparable from capital. The existence or lack of capital has huge impacts on the values of assets.

    So what is the appropriate level of credit capital that Geitner is trying to get to for which assets? And how do we know what is an appropriate level?

  49. Billy Jones

    market value of homes is pretty much what someone is willing to pay…..

  50. And the price someone is able to a house or other asset is based on the availability and cost of capital.

  51. Billy Jones

    that what happened the past eight years…..look where that got us

  52. Exactly. That’s the point.

  53. Billy Jones

    like leading lambs to the slaughter

  54. I can’t see with a controlling share or even “threats” in private it cannot transfer toxic assets. If its illegal for the banks to transfer the monies. And as an owner it should be able to supply Capital, the standard way would be to provide equity which the government would now own. American political discussion is full of assertions without any semblance of evidence that something is good or bad. In fact, one can very convincingly argue that while the state may be poor over the long term for routine management, it is far superior when significant novel decisions are required. Note that all believes this in practise. If this wasn’t believed in Wartime one would run the country by Lassez Faire, the magic markets then should do a better job than rational planned action. One never hears a critique of how the market allocates investment capital which is interesting because it is the place it is probably the weakest. Non critical pricing decisions are probably best to leave to an auction or market due to the effort otherwise required to get the price right as well as the inherent corruption in other solutions.

  55. Exactly agree, creating yet another credit bubble to explode is ludicrous and criminal.

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  57. CBS from the West

    Exactly backwards. It is money that has no inherent value. The inherent value of a house is that you can live in it. Its usefulness in satisfying this basic need for shelter does not change with the whims of any market. If you have one, it doesn’t really matter what “the market” thinks it’s worth–you can just live in it. The same with other real goods and services: they have inherent value in that you can use them to serve your needs and wants.

    Money is only worth what markets let you buy with it–its value is constantly in flux.

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