In Silicon Valley, one of the first things venture capitalists learn is, to paraphrase Guy Kawasaki, 'the art of the exit.' Looks like the Fed may need lessons.
Geithner and Bernanke continue to plan to have a plan...and the announcement today about the government buying the toxic assets sent the market into the kind of reaction usually experienced only by those using meth, heroin or cocaine.
And as Yves points out, "Wanting to have an exit strategy and actually having an exit strategy are two different states of affairs." Indeed.
Her questions as to what happens when the Fed loses money by selling what it owns are good ones. Especially when I think about it owning a ton of toxic assets.
Let's take the case of homes in default or abandoned. In Capitola, CA frends just found an abandoned home they think they'd like to buy - if only their real estate agent can find the bank that's still holding the paper on it. We can be pretty certain there's a large stock of housing banks won't even put on the market, because the price drop would be a killer. So they sit and wait for the gov to purchase the stuff. This may well provide banks with even more of a reason not to mitigate mortgages - they can effectively dump the stuff on the government, clean their balance sheets and get back to biz. Consumers be damned.
Is there an exit, or will banks simply say, "Please, may I have some more, sir?"
In Sartre's brilliant play, Huis Clos, the characters are depicted as being in hell awaiting their torturer - except that they come to realize there won't be one arriving. In fact, they are there to torture themselves. Is this the actual end game of the government's purchase of a big bag o' toxic assets?
At the end of the play, one character finds he has only to say the word and the locked door opens. Yet by that time they are all accustomed to their lot and the characters stay in hell, though they have the freedom to leave. It's my hope we don't repeat that scenario.
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