The right way to use private money to supplement public money when buying toxic waste

So the other day I posted about Ausubel and Cramton's proposal for buying toxic waste, aka mortgage-backed securities and other assets explicitly or implicitly tied to subprime mortgage debt rapidly going bad.

Nathan Higgins, who is working with Ausubel and Crampton (and is working with me on an unrelated project), sent me an email to clarify how private money would enter the auction process and why my suggestion is a bad idea. He writes:
Private capital would enter the market before the dynamic auction began. Interested parties submit demand schedules to the government. The total demand ... equal to government demand + all private buyer demand..... The private buyers thus get the same deal the government gets; no buyer plays a strategic role during the auction.

The problem with holding a second auction (to follow the government purchases) is that the Treasury is not very good at auctioning heterogeneous assets. The thing they are very experienced with is selling homogeneous assets to a set group of qualified bidders. In that auction N is always equal to 16 (I'm pretty sure about the number; might be 17, but I'm darn close) and Treasury holds totally separate auctions for all maturities. So we shouldn't expect that the Treasury will do a good job of putting stuff up for sale and earning a premium for taxpayers. The best way to include private capital is probably to simply include them in the first auction, thereby promising private capital the exact same deal that the government is getting as a monopolist.
Thanks Nathan. I guess I was thinking they could sell MBS one issue at a time, so the good would be homogeneous.

Comments

Post a Comment

Popular posts from this blog

Nonlinear Temperature Effects Indicate Severe Damages to U.S. Crop Yields Under Climate Change

Image
It's been a long haul, but my coauthor Wolfram Schlenker and I have finally published our article with the title of this blog post in the Proceedings of the National Academy of Sciences . We've been told that it would show up on the early-edition website this week. It hasn't shown up there yet so I guess it will come out tomorrow [Friday 8/28], probably late afternoon EST. UPDATE: You can find the article here . We set out to develop a better statistical model linking weather and U.S. crop yields for corn, soybeans and cotton, the largest three crops in the U.S. in production value. Our major new finding is that (by far) the best predictor of yield is a measure of extreme heat: how much temperatures exceed about 29C (84F) during the growing season. The threshold varies somewhat by crop--29C is the threshold for corn. Below this threshold, warmer temperatures are more beneficial for yields, but the damaging effects of temperatures much above 29C are staggeringly large. A
Read more

Renewable energy not as costly as some think

Image
The other day Marshall and Sol took on Bjorn Lomborg for ignoring the benefits of curbing greenhouse gas emissions.  Indeed.  But Bjorn, among others, is also notorious for exaggerating costs.  That fact is that most serious estimates of reducing emissions are fairly low, and there is good reason to believe cost estimates are too high for the simple fact that analysts cannot measure or imagine all ways we might curb emissions.  Anything analysts cannot model translates into cost exaggeration. Hawai`i is a good case in point.  Since moving to Hawai`i I've started digging into energy, in large part because the situation in Hawai`i is so interesting.  Here we make electricity mainly from oil, which is super expensive.  We are also rich in sun and wind.  Add these facts to Federal and state subsidies and it spells a remarkable energy revolution.  Actually, renewables are now cost effective even without subsidies. In the video below Matthias Fripp, who I'm lucky to be working w
Read more