toxic assests

 Liquidity and the Sociology of Knowledge: “How To Value” Toxic Assets

I was watching last Thursday’s Daily Show when the guest, the author of a recent book on the collapse of Bear Stearns, made a common enough argument: that we no longer know “how to value” toxic assets. What interested me was the difference between knowing the value of something and knowing “how to” value it (a difference the guest did not discuss much). As a society, we still know how to value anything: just look at its current market price. The problem with toxic assets is that the felicity conditions for the market no longer hold. That is, we no longer see the market for such assets (which exists, even if there are relatively few trades) as sufficient. It’s not simply that fewer people are trading, but rather, we’ve lost faith in the tools that we used to make such assets “hold together” (cf. Desrosieres). The bond rating agencies and the quantitative magicians that successfully built homogeneous assets no longer can do so, and thus purchases of specific assets no longer constitute a market.

So, to return to my earlier point, do we not know how to value these assets or do we simply not know their value? I think, perhaps, we do not even know what these assets are. That is, we have a failure in our practical ontology. Things that were treated as the same, that held together, have since fallen apart. If there were simply a decline in the number of transactions, a government agency could step in and start buying up assets (as has been attempted or proposed several times since the middle of 2008, e.g. the original TARP proposal). But if the problem is not just one of # of transactions, but rather liquidity in the Carruthers and Stinchcombe sense of information from one transaction being useful to understand the value of another potential transaction because the two goods are commensurable/homogeneous, then simply upping the number of transactions cannot help. If we want to rebuild our knowledge about the value of currently toxic assets, we first have to rebuild the homogeneity of those assets. But I’m not sure we actually want to do that - these assets failed to hold together (counterperformed?) in a spectacular way once already. Does that make sense?

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