Here’s the problem as I see it. Let’s say a bank buys a bunch of lottery tickets. How does the bank value this kind of “investment”? Does it book the sale value of the tickets, the full value of the lottery jackpot, or some model which takes into account the probability of winning the jackpot? It’s a problem inherent in valuing assets which don’t have a fixed value and the more and more meddling in trying to fix a problem like that doesn’t help investors.
Wow. Great take.
Great analogy.
We cannot fall into the Marxist trap that the market is a lottery. The market, the free market enterprise system, preserves freedom and individual liberty.
No bank buys a lottery ticket. The gamble is absurd as is the analogy. During the 1980s S&L crisis the government changed the rules on S&Ls as well as on the tax-preferred treatment of certain investments. These changes precipitated a crisis that was unnecessary and political in nature, not market based.
The same thing is occurring now. A combination of low interest rates (set by government through Fed/Treasury actions), tax incentives on mortgage debt, the government dominated secondary mortgage market, and MtM accounting rules precipitated this crisis. Without government intervention/involvement and meddling in the market you would not have had a RE bubble in the first place.
The presumption that all asset classes have an immediate/liquid market is absurd. There are many classes which are improperly valued if sold in the next five minutes. RE is one of those assets. A bank lends on cash flows, not value. Your down payment isn't as critical as your ability to service the loan.
MtM ignores this and exaggerates the downside. At the same time, in a boom, it can exaggerate the upside as values race up. Loan servicing is the most important aspect of lending, not home values.