I know that the chances are very small and that many would disagree, but in this environment and for this crisis how interesting would the pick of Paul Davidson for Secretary of the Treasury be?!? Davidson on evaluating toxic assets:
In the good old days, before “securtization “, when a bank made a loan, especially a mortgage loan, the loan contract was basically an illiquid asset that was listed on the asset side of the bank’s balance sheet. What value was put on these illiquid assets on the balance sheet? If there was no market for these illiquid assets — one cannot mark to market the asset!! So they assets were typically carried on the balance sheet at the value of the outstanding loan — until, it was
paid off — or defaulted on!Now a good neoclassical theorist would have said that the value of the outstanding loan contract is the computed present value of the future stream of cash receipts including the discounted value of the pay off of the principle (in the case of an interest only loan). Of course, the implicit neoclassical assumption underlying this type of present value calculation is that the future was “known” at least with statistical reliability, i.e., the future is determined as an ergodic stochastic process. If the future stream of payments are known with statistical reliability, then anyone who took a course in economics can calculate the “objective” actuarial present value. (And remember under the rational expectations hypothesis – the subjective probability distribution equals the objective probability distribution that governs future outcomes.)
If, however, the future is uncertain, i.e., nonergodic, then the present value depends on the subjective evaluation as to whether all the contractually payments specified (in monetary terms) to specific dates are actually going to be met by the borrower. A large down payment on a mortgage loan created a cushion for the banker in case a future, unpredicted, default occurred. For assets that are liquid, as I specify in my JOHN MAYNARD KEYNES (Palgrave, New York, 2007) book and the “securitization” article in CHALLENGE, there must be an well-organized and orderly markets. Liquidity requires a market maker to assure orderly markets– so that a holder can always make a fast exit and sell their holdings of any liquid asset at a price not much different that the previous transaction price.