Right idea, wrong implementation

Treasury's plans to bring private capital into unfreezing the credit and funds markets is the right idea. But the idea of investing "along with the government" will keep many private capital providers on the sideline. The best implementation of this idea is to provide low interest loans to a large number of firms who are in the business of investing. If the provision of such loans do not create any demand for the "toxic assets" in the bank balance sheets - that will tell us, the banks and the government that these assets are not worth anything.

The bank CEOs who appeared in front of the committee today all seem to believe that their assets are worth a lot - it is just that nobody wants to buy them. These high level executives may have forgotten the basic idea of markets and what they may have learned at graduate school - that the price of an asset is what the market prices it to be and not what the CEO thinks it is. Since they did not know what the assets were worth a few years ago - when they were buying them in massive quantities buoyed by the great leverage exception given to them by the SEC, it is unlikely they know what they are worth now. In some sense, they are the worst evaluators of assets in the balance sheets they created.

Breaking old habits is difficult. The tendency for policy makers is to "take control" of the process. It is a lot better if they provide the lubricant (in this case low interest loans) needed to get the machine going rather than attempting to drive it.  Thus far, all such "loans" went to a handful of institutions who apparently is at the top of the food chain - an argument accepted without questioning. What if a large number of "micro loans" are provided to every small business and capital provider in the country. Assuming there are 10 Million such businesses and small capital providers, the "micro loans" will not be that "micro" as the average loan can exceed $0.5 Mil. This will be a massive and uniformly spread stimulus in the economy - much more effective than trying to wake up the lumbering dinosaurs just because they are big and make a lot of noise. We are in a new world - the meteor has already stuck and the age of the small mammals has already begun. A few of the dinosaurs and their providers just do not know it yet.