Economic cold shower

One of the villains of Amity Shlaes's The Forgotten Man is uncertainty. Markets hate nothing more than uncertainty, which paralyzes decision-making and freezes capital. Typically, marketuncertainty is nasty, brutish, and short. Typically, government uncertainly is agonizing and long.

At the end of Roberts's and Kling's podcast (see my View from a Height blog at, Kling points out that there are vulture funds waiting to buy distrssed securities and properties in order to resell them at a profit, but that the holders are waiting for a better deal on a bailout. (Something like this may have happened with Citigroup and Wells Fargo fighting over Wachovia.)

This is bad for about 100 different reasons, but I'll pick 5 ways this royally screws up market operations:

1) It prevents mark-to-market rules from working, hiding losses when there effectively is no market.

2) It keeps distressed securities off the market, keeping markets illiquid.

3) The lack of a market in certain securities makes it impossible to issue new securities of that type.

4) It keeps the market from finding its level; something priced at 80 might sell for 50 after being dumped at 30; you'll never know the true value.

5) It keeps the vultures from earning money while not capitalizing the guys holding onto the assets.

I could go on, but you get the idea. It all adds up to nobody knowing what anything's worth, and nobody being willing to take risks because they can't price that risk adequately. As a result it freezes capital and damages the real economy.

FDR didn't help this problem, he made it worse. He got the politics of it - he didn't need to suggest a solution to get elected, and he steadfastly refused to work with Hoover after he was elected. I don't see anything from the forthcoming Obama administration to suggest anything different.