Amity Shlaes: Deal or no deal

In the O. C. Register opinion pages today, Bloomberg columnist Amity Shlaes argues that in business there are two kinds of people: deal people and price people. She says deal people are bad and price people are good, because only they put a price on things and price is essential.

Every columnist needs an attractive sounding (read eye-catching) theory, else they can't get in print. That's Shlaes' theory. It's only a theory. A columnist's theory doesn't have to be valid, only attractive. That's what Shlaes' theory is: attractive, not valid.

It isn't valid first because it's silly to try to divide business people into just two categories. They can be smart or dumb, wealthy or poor, successful or not, well educated or poorly, self-made or silver-spooned. They may come from marketing, manufacturing or finance. Some have had no background in business and no business training yet have been unbelievably effective. Bill Gates would be an example.

The distinction between deal and price is a false one. Prices are arrived at by deals: Seller has something to sell, buyer wants to buy. They agree on a price or there is no deal. The price of the deal includes all the add-ons and supplementals, like guarantees, terms and promises, some implied, some explicit. Every buyer and seller is concerned about all aspects of the deal -- price and other aspects -- and underlying every deal is supply and demand. Every consumer understands supply and demand because every consumer experiences it every time he or she visits the grocery store or the gas station. If tomatoes are plentiful, the price is lower. If tomatoes are scarce, the price is higher. The same with gasoline.

This has been understood since Adam Smith, and surely before. Amity Shlaes hasn't invented something new.

What Shlaes was trying to say, presumably, is that she doesn't want government putting it's finger on the scale, influencing the deal in favor of one party to the deal or the other. In this she has a point. Government shouldn't interfere with market forces, but it often does. In fact, it most often does. Mostly, government does it because somebody insists on it. People aren't patient. They want what they want and they want it now. So they put pressure on the government to act, and it often does, often not wisely.

Shlaes is wrong about the Bush plan (or more properly the Paulson plan.) In the Bush/Paulson plan, government has not put it's finger on the scale. The plan is voluntary. Investors and loan servicers don't have to participate unless they want to, and many have chosen to. What's in it for them? They avoid having to foreclose on some loans. Foreclosure is expensive. If a way can be found that enables a borrower to make payments on a loan instead of defaulting, and the loan eventually gets paid off and the lender gets a reasonable return, then both sides are better off. (Incidentally, business people measure return after eliminating sunk costs. Sunk costs are spilt milk. In making decisions about what to do next, business people measure return based on present value, today's value, not original cost. There is no point in crying over spilt milk, or sunk costs.) Business people make these kinds of deals all the time.

Shlaes seems to be concerned that the value (price) of some subprime loans or packages of loans may not be determinable now. The market (buyers and sellers) will decide that. Shlaes needs to be patient.