Wednesday, September 24, 2008

Bernanke Gets an "F" in Game Theory

As I mentioned in a previous post, the proposed U.S. acquisition fund would have to pay a premium over the market price for the bad assets to nudge the banks to action. However, Chairman Bernanke suggested in his testimony yesterday that the price should be close to the "held to maturity" value of the assets. Well........

- How was the held to maturity value determined?
- Who determined that value?
- Will the U.S. Treasury be able to verify these prices in a timely fashion?

As a tax payer, I want the lowest price possible. As an economics student, I understand that a concession is necessary. As a prudent person, I want a market to determine the price.

One more thing: this is not a "bail out". The pending legislation would authorize a sum of money ($700 billion or so) for the purchase of assets. These assets could appreciate in value and hopefully result in some benefit to the tax payers down the road. The key elements of the plan should be pricing, size of fund, eligible participants and management.

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