Wednesday, March 11, 2009

Friedman: Toxic Assets Just Need Some Love

Another day, another gem from Thomas Friedman. While Friedman correctly identifies fixing the banking crisis as fundamental to turning the economy around, he seems to have embraced the "toxic assets are not bad; they are simply misunderstood" fallacy. From the New York Times:
we need to get a market going that would bring fair value and clarity to the "toxic assets" crippling the balance sheets of our major banks. This will likely require some degree of government subsidy to private equity groups and hedge funds to get them to make the first bids for these toxic assets by guaranteeing they will not lose.
Who told Friedman this was a good plan? Could it have been...private equity guys and hedge fund managers? And what is "fair value" for the so-called toxic assets? Is it the price at which selling them will make banks solvent? Friedman has adopted the transparently untrue belief that toxic assets still have some fundamental value, but are being artificially depressed because of panic. Unfortunately, our Treasury Secretary seems to believe this as well. But facts are stubborn things. And the facts indicate that toxic assets are worth even less than what pessimists have projected. This is a solvency crisis. Insolvent, too-big-to-fail institutions need to be put into receivership, broken up into smaller pieces, and sold back to private investors. This will pose numerous technical challenges. It is not a free lunch. But it's the most cost effective way to create public trust that the financial system is healthy.

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