The root of bad economics

Even the Keynesians are abandoning the sinking ship of the Obama administration now. As well they should:

The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

All bad economics are rooted in a single concept: objective value. This was most obvious in the Marxist form of assigning an input factor, but it’s also implicit in the Monetarist notion of government-backed paper currencies. Since there is no such thing as objective value – subjective value is the heart of Austrian theory, which states that all values are intrinsically dependent upon the moment and the acting man – any political action or economic theory based upon it is bound to fail.

In the case of the Paulson/Geithner plan, they are substituting “true value” for objective value, but it doesn’t matter what it’s called, the relevant point is that it diverges from what anyone is actually willing to pay for it at this moment in time.