Mortgage crisis and information

Davydd at Big Lizards attributes the mortgage lending crisis and its spin-offs to a critical shortage of information in our economy.

What has actually failed is the world information supply. Simply put, everything related to finance, to trade, to buying and selling -- in short, everything connected with any kind of a market -- depends upon access to timely, honest, accurate, and believable information (hereafter "THABI"). For an example I have used before, you cannot buy a car based solely on a grainy picture in a newspaper, because you cannot put a value on it; does it even have an engine?

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That is exactly what has happened and is still happening today, all around the world: a global shortage of THABI, of timely, honest, accurate, and believable information.

This is caused by the lack of a particular kind of regulation, one that every economist, from Keynesian to libertarian (Austrian or Chicago-school), agrees we need: the THABI requirement. Like a fair, equitable, and trusted civil-court system, access to timely, honest, accurate, and believable information is a fundamental requirement for a market even to exist in the first place. This is why the market cannot itself correct for this problem: THABI is a lower, more fundamental "layer" than the market; the market sits atop THABI. Therefore, in the absence of THABI, the market cannot exist... hence cannot correct for the lack of THABI.

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As the market is unable to function without THABI, it cannot function to restore THABI. All that information must come from somewhere else; and the only "somewhere else" that can act quickly enough to stave off a global depression is the State. Because the State functions both within and without the market, it can force changes even when the market is stymied... just as it takes a State to enforce the decisions of a civil-court, because only the State can step outside the market to seize by force the bank accounts of those who flout the court's decision.

The direct injection of liquidity by Treasury buying equity is also outside the market, because that money is extracted from people by force, in the form of taxes. But at the core, even this direct investment is an attempt to buy time to complete the "transparentizing" (horrible neologism, I know) of the toxic assets -- the recreation of the information that was lost by multiple unregulated securitizations of massive collections of mortgages.

Once the THABI has been restored to the mortgage-backed securities and other instruments, the market can reboot itself:

1. The assets can be valued;
2. They will all have some nonzero value, because no mortgage is worth nothing (if nothing else, the land itself has value);
3. All will be saleable, though often not at as high a price as the financial institution purchased them;
4. Each institution will thus be able to figure out how big a write-down it must take... and whether it can even stay in business or needs to sell itself to another institution.

There... that's a market! With the restoration of the missing THABI information, the market can reboot, and the catastrophe will be averted. So long as partial-nationalization of the banking industry lasts only long enough to retransparentize the toxic assets, thus allowing the market to begin functioning again, it will be an acceptable, even necessary intervention.