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Update on ongoing financial crisis

 Having set the basic story, Krugman is getting more skeptical about the Paulson "comprehensive" plan.  His standard of judgment can be found in this and that posts.  They are highly recommended.  By the way, this morning's Nikkei has 竹森俊平『未曾有の事態に模索続く』(経済教室、2008年9月22日).  So, Nikkei's 経済教室 has covered 清滝、植田、and 竹森, so far.  All of them are worth reading.

 If I may comment just for memo to self, I think the current Paulson's "comprehensive" plan is still a band-aid approach, not deep enough, but understandable.  First, yes, the problem has started from mortgage sector, but it does not mean that curing mortgage problem is to address the root cause.  It is because the problem has propagated through other sectors, such as almost all the derivatives, credit card, or automobile loan.  And, this entire focus on mortgage may not be sufficient for stabilizing the credit market.  Second, we don't know the fair value.  So, it could be a gift from heaven to distressed financial companies.  And, the management will be intact.

  So, I think this plan is still an ad-hoc policy piece.  A task for the next administration is to inquire the real value of the mortgage assets acquired.  It might mean that bureaucrats have to examine real estates, as they did in RTC.  The value of real estate depends on the cash flow from the residents (rent).  Probably, the treasury ends up with RTC-like institution in 2009. 

  One question.  What do financial institution get by selling bad mortgage-related assets?  Treasury bill?  Fresh deposit at some banks?  Fresh deposits at Fed?  The Paulson scheme reminds me of Mexican FOBAPROA workout program.

  Having said that, I would quickly go on to say that perhaps something is better than nothing.  Credit market should be functioning to any extent.  But, unless you dig enough into the bad assets, you cannot tell the real value.

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