Reverse auctions: a defense

The US is embarking on the greatest public intervention into financial markets since the Great Depression. The ultimate success or failure of the intervention will depend, in part, on the fine details of the auction design.

The basic auction approach suggested here is neither new nor untested. It has been used successfully in many countries in recent years to auction tens of billions of dollars in electricity and natural gas contracts, as detailed in Section 8. Moreover, it is quite similar to the approach that has been used to auction more than $100 billion in mobile telephone spectrum worldwide. It is a dynamic version of the approach that financial markets use for share repurchases. If implemented correctly, each auction can be completed in less than one day. And the same software used for implementing electricity and gas auctions could be used to initiate these auctions in October.

Here is the whole paper, thanks go to Samson in the comments section.  So far this is the best paper I’ve seen on the topic.  Tim Harford offers other useful links.  Still, I am inclined to agree with Arnold Kling:

The theory that you can fix credit markets by "removing the clog" of mortgage securities is just that–a theory. My guess is that it will not work. I am sure that other things will have to be tried sooner or later–probably sooner. I hope the other moves work. I do not think it is at all realistic to rely on the Paulson plan.


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