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    Greg and Beth

    the political and personal musings of two
    mountaineers living in west-central Florida
     
    Credit and hot potatoes Comment
    Nick, 10/10/08 9:32:44 pm
    Imagine you are a bank. Someone comes in and asks you for a loan. You look at their most recent asset statement. It looks good. You look at their income statements. They look ok. You're about to cut them a check when you find out that while they do have a lot of assets, the value of those assets is not so clear as it first seems. You decide not to make the loan. Then the government comes to you and says "Here. Take this money. You just don't have enough capital." You say, "Thanks!" You then re-review the person who wants the loan. There is still something bothering you. You have plenty of money to lend out. What could it be? "Aha!" you shout. "It is uncertainty rearing its ugly head!" Even with the money and credit given to you to cover previous lost assets, you just still don't know if they person who wants a loan from you will be able to pay, given that their assets are still in question. So you hold out. You hold out until you can see their next asset statement. You hold out until you can see if those assets do have any value and how much that may be, so you can determine how much you are willing to lend out to them.

    What can break this uncertainty? Why, only uncertainty's arch-nemesis: certainty! But how can certainty possibly break into this ugly situation? It can ride the invisible hand that is the free market price system. The market cannot attempt to equilibriate so long as there is uncertainty in the marketable value of assets.

    If your only assets are based on someone else's ability to use their assets to pay you and their assets are based on someone's ability to use their assets to pay them and their assets are based on someone's ability to use their assets to pay them and their assets are based on government-mandated artificially low interest rates and easy lending practices...well, I think you can get the picture. Until asset prices are known (and that can only happen through the wonder of exchange ratios and the free market price system), uncertainty will prevail.

    Throwing money and easy credit at the problem does no good at all until there can be a market valuation of bad or faulty assets. There can be infinite liquidity, infinite credit, an infinite money supply, but it doesn't matter if lenders are not willing to use it because there is price uncertainty.

    Or...you could pump more credit in, throw more capital in (all the while stealing it from consumers: read as taxpayers, reducing their ability to consume and generate profits for businesses and creditors) and further the artificial valuation of assets. In other words, imagine playing hot potato, while the government keeps adding more and more hot potatoes into the game in an attempt to cool your hands.

    [Comments are closed after a month.]

    Re: Credit and hot potatoes
    Gregory Morris, 10/11/08 8:46:24 am
    And I bet if you were a science geek, you could also compare it to Schrödinger's principal... we aren't certain if the cat is alive or dead until we observe it... so we say it is both alive AND dead until we open the box and look.

    In the case of America's credit/housing situation, someone opened the box and found a dead cat.
    Re: Credit and hot potatoes
    Nick, 10/11/08 11:34:15 pm
    No, it's more like no one can find the box at all. The government is fabricating boxes and telling people it's the real thing. It's like when you are taking care of someone's pet and it dies and you replace it with one that you think looks the same, but it's really not and antics ensue, like in the movies. Only, the government boxes have money in them and a note saying "well, we don't know where the cat is, but I assure you that this is in fact the original box, so here, take this and buy a new cat with it."
    < "Search Term Q&A: More on Waiting Periods"
    "Dealing With Hoplophobia" >


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