Mark Thoma writes:
"In addition, as time has passed and prices have fallen, solvency issues have come to the forefront - the balance sheet problems are no longer hidden by overpriced assets - and the solvency problems must be addressed directly. That means that if there is no separate program to provide an infusion of capital, simply removing the toxic assets from the balance sheets through government purchases at current prices - prices so low that the banks are insolvent - won't be resolve the problem."If the prices of "toxic" assets has fallen overtime, isn't this evidence of a very low true value of the assets? The original argument was that a panic had temporarily suppressed the prices of said assets and that the government only need take hold of these assets until prices rebounded. From what I can tell, the credit crisis is not as severe as last fall. So if the price of assets is lower now and the credit crisis not as severe, shouldn't one conclude that the continuing fall in these asset prices is due to a deterioration in the fundamentals of those assets?
Maybe I'm missing something, or maybe Thoma is wrong about the price of mortgage related assets, I don't know. But if he's right, then why should he be supporting the government purchase of these assets (or the government backing private purchases of these assets)? The taxpayers would lose big time as we are seeing that the low prices of mortgage related securities wasn't phenomenon of the credit crisis. To me, Thoma's words provide support for some kind of bankruptcy procedures for banks, such as the proposals put forth by Luigi Zingales.
