What value do houses have? What value do mortgages have? What value does gasoline have? Or, what value does labor have?
Questions like these seem to have legislators, regulators, economists and commentators tied in knots. In order to get the toxic assets off the bank balance sheets they must know how to establish the value of those assets. In order for lenders to make mortgage loans they want to know the value of the houses taken as security. The question of value comes up over and over.
So, what’s it worth?
The people asking these questions about value seemed to have missed a key factor in sound economic theory. That key factor consists of the subjective nature of value. Only an individual consumer can determine the value of anything on the market. And that consumer can only express value in terms of his personal preferences for the item in question relative to other economic goods.
He might value apples more than oranges, or a house more than a tractor; or a computer more than a case of paper, or a motorcycle more than a donkey. But none of these items have an intrinsic or fundamental value. Value has no unit that the consumer can apply to all goods nor that he can add up to determine his total wealth.
Doesn’t money give us a measure of value?
No. Money consists of another economic good for which consumers have a preference to hold relative to other economic goods. The value of money goes up and down in the ordinal scale of each consumer’s preferences just like all other economic goods. When the consumer pays $15 for a beer at the Super Bowl, that does not mean that beer has a value of $15. It means that the consumer, at that place and time, preferred having the beer more than having the $15 he paid for the beer.
Doesn’t cost determine value?
Again, no. Cost simply reflects what a supplier gave up to acquire the economic good based on his preference. If our beer salesman paid $100 for the beer referred to above (based on his expectation of captive sales), that does not make it worth $100. If no one in the audience values the beers he bought more than $100, he will have to sell them for $15 or whatever he can get (or take them home for his own party.)
So, back to the substance of the question. How can our friendly regulators value assets owned by the banks they want to bail out? In two words, they cannot. Only individual buyers determine value. And only actors in a free market can determine price, based on their values.
So, what do they do?
Let the market decide.