osewalrus (osewalrus) wrote,
osewalrus
osewalrus

Merril Sells Debt Below My Proposed Price, Proof Coase Never Considered The Problem of Delay.

My thanks to goldsquare for the pointer to the NYTimes piece in question, validating yet another cassandrafruede moment. For those who missed it when I coined the term, "cassandrafruede" is the feeling of grim pleasure you get from other people's pain because you warned them about this and they refused to believe you, even though you are caught up in the mess yourself through no fault of your own.

In this case, it also provides a useful illustration of the problem with reliance of the the Coase Theorem, although I suppose folks will argue this is captured in Coase's followup The Problem of Social Cost. But it isn't, because in this case responsibility was delegated to the market via property rights in the first instance, and the outcome was still significantly less efficient and imposed greater social cost than the proposed government intervention.

But I shall leave the math to fatlefty and simply content myself with the observation.

Almost a year ago, I proposed a fairly straightforward solution for the subprime meltdown. I suggested allowing debt holders to sell any note secured by a primary residence (so no speculators) to the government for 25 cents on the dollar. This would allow the holders of the debt to write off their loans, feeling enough pain to learn their lessons but buying sufficient security to make it worth it. From a public policy perspective, it would stabilize the financial markets and allow people who were basically solvent but caught up in the meltdown to renegotiate their loans with the government, avoid foreclosure, and stabilize property values.

Now, the NYT reports that Merrill is clearing out all its potentially bad paper for a face value of 22 cents on the dollar, although once the actual calculation is done, it drops further.

I, of course, am experiencing plenty of cassandrafruede. But there is a snigger from the worshipers of the Gods of the Market Place. Look, they say, Merrill reached the price you predicted without any government intervention. Coase was right.

The Coase theorem, for those unfamiliar with it, predicts that the market will ultimately resolve the distribution of property rights into its most efficient configuration. Accordingly, the government should avoid efforts to distribute rights and should encourage conversion of all scarce resources (including rights to act in ways that can be characterized as a property interest in scarce resources, like cap-and-trade carbon emissions or broadcasting) into tradeable property rights. So if the market reached 22 cents, then it was better for the market to do so than for the government to adopt my solution a year ago.

Except, of course, for the enormous transaction costs and opportunity costs created by the year of delay.
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