bobbyw24
Banned
- Joined
- Sep 10, 2007
- Messages
- 14,097
The Rationale: the Problem is Insolvency, not Illiquidity
1.1 The policy premise: the prices for bank assets became "artificially" depressed by banks and other investors trying to unload their holdings in an illiquid market. As a result, they no longer reflect their true hold-to-maturity value. So... by purchasing or insuring a large quantity of bank assets, the government (the Fed) can restore liquidity to credit markets and restore banks.
1.2 The policy error: the "credit crunch" wasn't about liquidity at all. It is about solvency. Insolvency can't be fixed by short-term subsidies. You need liability reduction, asset appreciation, or greater long-term equity cushion.
Long-term subsidies, like the Fed holding who-knows-what to maturity, equals soviet communism, as every hooligan knows. Short-term subsidies transfer credit risk, and they leverage parasitic behavior. Positive valuations assigned by shareholders to equities arise solely from anticipation of value transfer from firm debt-holders or resource transfers from US taxpayers. Debt-holder get a piece of this action too if governments overpay for "toxic" assets backing up their claims. But "everybody" receives more than fair value for their investments.
So everybody's happy, right? Umm, no.
1.3 The policy victims: everyone is happy except taxpayers and currency longs. Government resources that support markets by insuring assets against further loss amounts to providing an insurance policy at a premium way below what is fair for the risks that US taxpayers bear. The Fed is just a retrocessionaire with a massive book of correlated tail risks. Others will be on the stick when they breach treaty.
With all the slosh, no one knows the extent of the insolvency problem anymore. The Fed has put a bid under possibly worthless assets. Allowing the secondary market to price assets without the Fed bid would be the best way to assess the insolvency problem. The test condition is if asset prices revert back to their "crash" valuations, then those prices imply that some major US banks are now legitimately insolvent. Bank assets are fairly priced at valuations that sum to less than bank liabilities.
1.4 For some assets, the crash valuation was right. Securitization will revive in time, because it is an excellent idea. But the current reboot focuses on supporting the status quo: lack of transparency, reliance on flawed (understatement of the century) rating agency designations, and mispricing of underlying cash flows. It is ridiculous to think the market is going to resume with uneconomic valuations without continued government guarantees.
Market Crashes as Moments of Clarity
2.1 The world isn't sure what to make of risk anymore because of the massive distortions. One year ago the whole world was going up in flames. Now the only thing imploding is sugar #11. What passes for risk these days is a sterilized construct bounded by government insurance cover on the downside. You know...the Greenspan put.
2.2 Stalling market crashes isn't a desirable end in itself. Crashes aren't any more irrational than any other trading action. Crashes are just sudden moments of clarity that bring investors to new "fundamental" valuations. Greenspan putzes and Bernanke variations don't short-circuit price discovery indefinitely, they just make transitions to different valuations even more violent for more and more bag-holders.
2.3 Investors get painful, periodic lessons in risk to enhance survivability. Risk is so much more real and interesting and wild and painful than the idolatrous constructions people imagine it to be. Grossly unsuccessful mutations such as central planning don't last long in this world. Nature cleans up after herself.
The Fed is fast gestating into a mutation like the five legged puppy, the medically deformed kitten... the two faced mutant pig. The gene code needed to express it? Simply sustain institutions unfit for survival, and by implication, penalize those most fit to survive. See how this works? First governments dilute capital loss by backstopping losses, then the two instruments of modern economies, central
banks and treasuries, transfer the losses to present and future taxpayers, while at the same time, capital holders get their base eroded over time through currency devaluation.
http://www.silverbearcafe.com/private/04.10/mutantpig.html
1.1 The policy premise: the prices for bank assets became "artificially" depressed by banks and other investors trying to unload their holdings in an illiquid market. As a result, they no longer reflect their true hold-to-maturity value. So... by purchasing or insuring a large quantity of bank assets, the government (the Fed) can restore liquidity to credit markets and restore banks.
1.2 The policy error: the "credit crunch" wasn't about liquidity at all. It is about solvency. Insolvency can't be fixed by short-term subsidies. You need liability reduction, asset appreciation, or greater long-term equity cushion.
Long-term subsidies, like the Fed holding who-knows-what to maturity, equals soviet communism, as every hooligan knows. Short-term subsidies transfer credit risk, and they leverage parasitic behavior. Positive valuations assigned by shareholders to equities arise solely from anticipation of value transfer from firm debt-holders or resource transfers from US taxpayers. Debt-holder get a piece of this action too if governments overpay for "toxic" assets backing up their claims. But "everybody" receives more than fair value for their investments.
So everybody's happy, right? Umm, no.
1.3 The policy victims: everyone is happy except taxpayers and currency longs. Government resources that support markets by insuring assets against further loss amounts to providing an insurance policy at a premium way below what is fair for the risks that US taxpayers bear. The Fed is just a retrocessionaire with a massive book of correlated tail risks. Others will be on the stick when they breach treaty.
With all the slosh, no one knows the extent of the insolvency problem anymore. The Fed has put a bid under possibly worthless assets. Allowing the secondary market to price assets without the Fed bid would be the best way to assess the insolvency problem. The test condition is if asset prices revert back to their "crash" valuations, then those prices imply that some major US banks are now legitimately insolvent. Bank assets are fairly priced at valuations that sum to less than bank liabilities.
1.4 For some assets, the crash valuation was right. Securitization will revive in time, because it is an excellent idea. But the current reboot focuses on supporting the status quo: lack of transparency, reliance on flawed (understatement of the century) rating agency designations, and mispricing of underlying cash flows. It is ridiculous to think the market is going to resume with uneconomic valuations without continued government guarantees.
Market Crashes as Moments of Clarity
2.1 The world isn't sure what to make of risk anymore because of the massive distortions. One year ago the whole world was going up in flames. Now the only thing imploding is sugar #11. What passes for risk these days is a sterilized construct bounded by government insurance cover on the downside. You know...the Greenspan put.
2.2 Stalling market crashes isn't a desirable end in itself. Crashes aren't any more irrational than any other trading action. Crashes are just sudden moments of clarity that bring investors to new "fundamental" valuations. Greenspan putzes and Bernanke variations don't short-circuit price discovery indefinitely, they just make transitions to different valuations even more violent for more and more bag-holders.
2.3 Investors get painful, periodic lessons in risk to enhance survivability. Risk is so much more real and interesting and wild and painful than the idolatrous constructions people imagine it to be. Grossly unsuccessful mutations such as central planning don't last long in this world. Nature cleans up after herself.
The Fed is fast gestating into a mutation like the five legged puppy, the medically deformed kitten... the two faced mutant pig. The gene code needed to express it? Simply sustain institutions unfit for survival, and by implication, penalize those most fit to survive. See how this works? First governments dilute capital loss by backstopping losses, then the two instruments of modern economies, central
banks and treasuries, transfer the losses to present and future taxpayers, while at the same time, capital holders get their base eroded over time through currency devaluation.
http://www.silverbearcafe.com/private/04.10/mutantpig.html
