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...even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.
Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets),
People have heard for too long that the problems are that the US does not save enough and needs manufacturing... and blah, blah, blah, ***, ***, ***.
Its so much more than this and grander in scale. What good does manufacturing do during a glut? The goods are piling up and the manufacturing economies are even worse.
What we are seeing is global consumer demand reflective of relative slave status. We have the unfulfillable demand of slaves not able to consume their own labor. Slaves by definition do not consume their own surplus.
The post Bretton Woods speculative money creation/debt machine has thoroughly soaked the Western citizen with debt. Equity and speculative equity represents the carrying capacity of more debt and money creation. This sponge is soaked. Money creation is lending. Who can or is willing to borrow?
Moving over to Asia the recycling of output into capital and foreign debt all soaked into the Western sponge of speculative debt/money. This method of Chinese consumer austerity and post depression Japanese self imposed austerity is more of the same. Slaves who cannot consume their own output.
To keep any semblance of this monetary system, which in reality is a labor and small market wealth stealing debt slavery, it will bottom out when there is little else to steal. They are allowing bankruptcies and capital consolidation and destruction ripple through the system while they keep the FIRE economy core insulated with bailouts. When this process is over the remains will be brought to life again with the same speculative credit system where people will be manipulated once again to tend a garden they think is theirs to keep. It may not even be in the US. And yes, when it does start again it will be inflationary. First by inflation and then by deflation.
This is the way around the old problem of land rents where tenants would do little to improve the land. Just make them think its their land and then take it with a predatory money system.
Much of the problem has to do with the mark to market accounting and the inability to estimate and book the value of many assets.
Just because no one wants to buy your house and car does not make them worthless... they are still performing assets, but mark to market declares them zero value. And if you then leverage the values you can change a 25% drop into a 500% drop.
The financial markets are in serious trouble, but I would argue that much of the insolvency has as much to do with old accounting of new investment vehicles than actual cash flow and real asset value.
I certainly don't know the right path through this but declaring a panic and further damaging markets is certainly not the answer.
Much of the problem has to do with the mark to market accounting and the inability to estimate and book the value of many assets.
Hi cdelena,
How can you estimate the value of a house when a house = a house? Previous money creation caused inflation which caused housing to go up which made housing an investment. Its incestuous. The book value is meaningless at this point. A better measure is income to housing ratios. If its more than 3 to 1 wage to cost per annum , its bloated.
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Just because no one wants to buy your house and car does not make them worthless... they are still performing assets, but mark to market declares them zero value. And if you then leverage the values you can change a 25% drop into a 500% drop.
Its the equity portion that is worthless. A machine that makes a dollar a day where the payment is 2 dollars a day is bankrupt. However someone else who owns this outright is just fine. Its a dollar a day enterprise. Again just like a business has an enterprise value that is in no way related to the financing. If a business is worth a 100k and owes 80k its equity market cap is 20k but that does not change the value of the business. However as of now the owners are not solvent. The problem is these are personal assets not a means of production. If my pet is worth a million to me its not worth that to a bank. So their assets now violate the bank accounting rules all over the place. They should have never been allowed to finance them in this way. If a society is going to print money at a debt based upon speculation then it sure better be a productive asset. A house?
All that debt was manufactured by fractional reserves. We need to flush bank debt out of the system in an equitable way. Issuing treasury notes would have done that. Now they would need to be targeted. First fraudulent loans would be tossed as garbage and the people responsible would go to the big house. I would then immediately provide each house hold with and average of 20k in treasuries(as tax credits related to income) that would be required to pay down debt first. If you have a mortgage, you pay it down. If you don't,
you get cash. I would repeat as needed. This would unwind the speculative debt interest bearing money with interest free money as well as forgive the ill gotten debt.
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The financial markets are in serious trouble, but I would argue that much of the insolvency has as much to do with old accounting of new investment vehicles than actual cash flow and real asset value.
I certainly don't know the right path through this but declaring a panic and further damaging markets is certainly not the answer.
I do. I know exactly what to do. However I was not backed by an international hedge fund speculator by the name of Soros.
All the bank accounting rules are for are to stop banks from printing money. If a banks make loans that are uncollected thats what it is. So when that is effectively the operation, its shut down. Thats the system.
When savings and loans were still operating in the 80's some looked just fine. They were "solvent". The problem is the asset keeping them in the black was "good will". I make 10 mil in loans and 5mil goes belly up. I collect the interest on the good 5 mil and put 5mil in good will on the books as an asset. Its "solvent" on the books. Its all book keeping. Thats how some of it was done. However all it is is a post punitive process based upon rules when they are shutdown.
We do not have a money token system when money tokens accumulate into a bank and then the bank seeks to circulate them based upon market feedback that there is a surplus. Nope, not one bit. Wouldn't it be nice if the society at large told the banking system there was a surplus to invest? But no, our system is speculative. Some banker decides they will print money based upon what they think the asset will return. It is a speculative , non market driven, bubble banking system that goes pop.
Much of the problem has to do with the mark to market accounting and the inability to estimate and book the value of many assets.
Just because no one wants to buy your house and car does not make them worthless... they are still performing assets, but mark to market declares them zero value. And if you then leverage the values you can change a 25% drop into a 500% drop.
The financial markets are in serious trouble, but I would argue that much of the insolvency has as much to do with old accounting of new investment vehicles than actual cash flow and real asset value.
I certainly don't know the right path through this but declaring a panic and further damaging markets is certainly not the answer.
I think it's been time for closing down of debts in Federal, State, Local, Business and public. Not popular with many but thats what I believe. Heck, keep my debt for the rest of my life and give younger persons in life that have heavy collage loans and other debts a fresh start.
Deuteronomy 15:1
מקץ שבע שנים תעשה שמטה׃
"At the end of every seven years you shall grant a remission of debts."
Deuteronomy 31:10
ויצו משה אותם לאמר מקץ שבע שנים במעד שנת
השמטה בחג הסכות׃
Then Moses commanded them, saying, "At the end of every seven years, at the time of the year of remission of debts, at the Feast of Booths,
Much of the problem has to do with the mark to market accounting and the inability to estimate and book the value of many assets.
I think your logic is faulty here.
What mark to market accounting does is account for an asset at its fair value today rather than its historical value or utility value. The problem has arisen because the market for many toxic assets has collapsed. So what is the value of an asset for which there is no market? Effectively zero.
The market for "real" assets such as housing has not collapsed. Real estate still has a market value but it is less than it was 18 months ago.
It is always dangerous to blame accounting for financial ills. All the accounting does is to reflect the true value of assets at a point in time. You may still have a utility value in your home despite it losing 40% of its value. However, you may also be technically insolvent too.
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