The ''new'' Geithner plan

1 commento (espandi tutti)

By ambiguity I mean a situation in which people have a hard time assessing the relative likelihood of alternative events -- in this case probability of repayment and so expected returns of various types of MBA's. In other words, toxic assets may be like the incompletely specified urn in Ellsberg paradox, for investors and bankers alike. This is what I mean by "no one knows how to price them".

Yes, I know there is controversy among theorists about whether such a situation in the end makes sense or is just another behavioral twist, yet it is worth asking whether the revelation mechanism you suggest (which I'm very sympathetic with) is robust to this possibility.

I think it is robust in the following sense: if bank managers have no clue, they will not put any money anywhere thus revealing that in fact they have no clue.