Free market in troubled assets and banks owning troubled assets

Ezra notes this about market effects on pricing of the troubled assets and the banks holding them:

One odd argument I stumbled upon while reporting out the PPIP story yesterday that has relevance to this chart: Part of the story behind the crash in lending earlier this year was that large investors apparently sat on their money hoping that the banks would have to unload troubled assets at fire-sale prices. They didn't want to invest in normal opportunities because they sensed the possibility of extraordinary opportunities. "I know a bunch of hedge fund people who thought these things were screaming bargains," recalls Douglas Diamond, a banking expert at the Chicago School of Business, "but would become even bigger bargains soon."

Now it looks likely that the banks that own these assets are going to try -- and might even succeed -- at holding these things to maturity. Which means that it might be the banks holding the assets, rather than the assets themselves, that are the bargain.

Toxic Asset Relief Program: DOA

The administration's plan to buy bad debt from banks to help them clear their balance sheets is on indefinite hold due to lack of interest from the banks.

Ezra analyzes what this means: either a) banks would be rendered insolvent if they participated (i.e. the plan wasn't right to achieve its intended purpose of saving banks) or b) banks no longer need the help.

Re: Truth in Budgeting

I never got too excited about it (accounting for the war in the budget) one way or the other since war expenditures are necessarily a series of one-time expenses except for items like payroll and fixed costs (and continuing expense that occur during peacetime). But, I can certainly agree that things are simplified if all eggs are counted in one basket.

It will be interesting to see how the following things get accounted for:

TARPS I and II,

MOAB (mother of all bailouts),

Regular budget,

This recent save the homeowners’ mess, and

What’s the other thing? I’m missing one—oh, Detroit.

If I understand correctly, TARPS I and II can probably be off budget as extraordinary, one-time expenses, ok, two-time expenses. Likewise Detroit…once we all come to terms that GM and Chrysler need to be put out of our misery and stop kicking the bankruptcy can down the road. Also, if we’re now done with the foreclosures and underwater homes (I missed that memo by the way, I thought the term was upside-down), that, too, can be off budget.

The budget is the budget, not much we can do about that and I guess the war costs will show up there now since we’ll be cutting all those things cold war things we don’t need.

I think that MOAB will be more problematic. It appears—and no, I haven’t read it—that a lot of this stuff may be ongoing budget issues…like what the caterwauling on the right is calling “the end of welfare reform.” Whether that is what it is or not, it does seem to obligate federal tax dollars to the states on an ongoing basis.

My head hurts.

[Update: I guess I have to revisit TARP I and the first half of the budget for this fiscal year since they were passed under Pres. Bush. I'll go ahead and ascribe TARP II to President Obama since Bush punted.]