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In his speech on the new bailout strategy yesterday, Treasury Secretary Geithner stressed the complexity of the current situation in our financial markets. Later in his testimony before the Senate, he said he hadn’t heard any good ideas yet on how to value assets without market prices, which is a critical part of his plan to purchase bad assets from banks. He’s right about how complex the market in securities is – or any large market in any good for that matter, but he fails to take the next logical step to conclude that price calculation without a market is impossible.
The famous socialist calculation debate of the middle part of the last century that took place over many years in the economics journals was a discussion over the very problem that the Secretary faces. Austrian economists Ludwig von Mises and F.A. Hayek argued that economic calculation absent a market economy was impossible.
Virtually anything in the world could have an effect on prices for any given buyer. They come about in a market economy by individuals demonstrating their willingness to pay for goods and services. The interplay between supply and demand over time tends toward a market clearing price that tends to satisfy more and more consumers and producers over time. The calculation of the “right” price is impossible without the interplay of supply and demand that will be absent under Geithner’s plan. Even if he mixes private and public capital together into a bad asset-buying fund, the government will still distort the prices away from what they would have been in a market economy.
There is no way for him to accurately calculate a price that the market might have paid for these assets. He understands how complex the system is, but doesn’t take the next step to conclude that such a calculation is impossible. He should be reading Mises and Hayek to understand that the problem he faces has no solution.