Bernanke Is Fighting the Last War

Wall Street Journal ^ | OCTOBER 18, 2008 | BRIAN M. CARNEY

[BGHater]

Thanks for the post.

[USFRIENDINVICTORIA]

“Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more.”

The issuing of so much “monopoly money” puts the greenback’s “world reserve currency” status at serious risk.

See Travis McGee’s # 26 in this thread:

http://www.freerepublic.com/focus/f-news/1913159/posts#26

[Moonman62]

At least she agrees that the toxic assets have to be cleared out of the system. I think what we are seeing now is governments attempting to spread out a safety net before that’s done.

[FightThePower!]

If you understand our banking system, you know that America can never get out of debt. They designed it this way.

[JasonC]

"Creditors are no more worthy of being rescued than ordinary people"

Earth to old bat in denial - the ordinary people *are* the reckless creditors, called "bank depositers". And they are also the reckless debtors, called "homeowners".

The Fed is not fighting the last war, and the bank recapitalization was entirely required. Forcing more firms into bankruptcy won't recapitalize anything, it will just leave the government the only actor willing to provide bank capital.

[JasonC]

If you understand *accounting*, you know that *no economy*, ever, "gets out of" debt. There is a liability for every asset, first principle of accounting.

And for the millionth time, debt is not a sign of negative net worth, the net worth of American households is over $50 trillion, and it 4 times their debts.

[FightThePower!]

“If you understand *accounting*, you know that *no economy*, ever, “gets out of” debt. There is a liability for every asset, first principle of accounting.
And for the millionth time, debt is not a sign of negative net worth, the net worth of American households is over $50 trillion, and it 4 times their debts.”

Yes, the “asset” on the other side of our “debt” is future tax revenue. F-—ing great!

[Jim Robinson]

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.

To err is human. To FUBAR requires government intervention.

[Anti-Bubba182]

"...But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."....."

Derivatives

[JasonC]

No, no, no, no, no, for the millionth time no!

Americans own --- all the buildings, every single one you can see. All the houses, every single one you can see. All the businesses, every single one you can see. All the professional offices, all the stock, all the bonds, all the companies, all the power plants, all the mines, all the pipelines, all of it, all worth $71 trillion as of mid September of this year, with only $14 trillion borrowed against that sum.

Geez o flip, isn't there a single economically literate conservative left in the world?

[biff]

OK, JC, I got right here in front of me 252 ozs. of gold bullion, mostly 1 ouncers collected over 3 decades. Would you please tell me where the liability is? Don’t owe anybody a dime, own house and cars outright. As I see it, the gold is an asset but where is the liability?

[palmer]

all the stock, all the bonds, all the companies, all the power plants, all the mines, all the pipelines, all of it, all worth $71 trillion as of mid September of this year, with only $14 trillion borrowed against that sum

$51 trillion borrowed. The value of the assets is dropping as the real estate bubble deflates, paper value is not real value. The proof is fairly obvious, the income streams need to match up to debt burden and they don't, so the assets are obviously overvalued (not supplying income). It takes about 15% of the current 13T in income to pay just a 5% nominal interest on the debt.

[FightThePower!]

You are an idiot. We are bankrupt.

[marshmallow]

The Fed is not fighting the last war, and the bank recapitalization was entirely required. Forcing more firms into bankruptcy won't recapitalize anything, it will just leave the government the only actor willing to provide bank capital.

Ms Schwartz gets it.

What investors need now is a good reason to believe corporate balance sheets. Otherwise, it won't matter how much taxpayer money gets pumped into ailing financial institutions. We'll still be risking systemic meltdown because nobody, especially the banks, will be able to trust anyone else's books.

[palmer]

To FUBAR requires government intervention.

Many people have pointed out that the government required loans be made to deadbeats, creating a rotten core within a lot of the securities. But it is also a fact that the government made credit too cheap for everyone and is doing so again right now. Part of the result is that cheap credit is used for leverage speculation such as the commodities boomlet last spring. The result of that is businesses that needed those commodities (or energy) were starved and had to lay people off.

Another government screwup that, as she points out, the government saved some firms and not others. The fact that they saved any, and that it was known in advance that they would, creates moral hazard. The moral hazard had several bad effects, first the share prices went down because the shareholders were the first to get screwed when the govt took over. That starves those companies of capital and make them more likely to fail.

Second, the credit default pricing was distorted. Hedge funds were able to speculate on Fannie and Freddie being taken over and make money when they were by buying credit default swaps even without owning F&F bonds.

Third as she points out, it gives firms like F&F an incentive to make bad decisions because they know their politicians will defend them.

[berdie]

I understand accounting pretty well.

If you have a huge debit in retained earnings...you have a real problem.

I’ll bet the US balance sheet reflects this.

Excessive debt is not good.

[JasonC]

What legal entity owns the bullion?

How did that legal entity come to own the bullion?

Accounting is about ownership, not about what exists. What exists hasn't changed since the earth formed, only how it was arranged, where, in what forms, how it is valued and how it is owned.

[JasonC]

Wrong, the balance sheet of US households has a huge credit in retained earnings, $57 trillion. And an income over $11 trillion a year, disposable income.

In no decade since WW II have US households added debt even half as fast as they have added assets.

Go read the Z.1 flow of funds statements put out by the Fed and review them back to WW II. Then we will talk. Until then, you are rebreathing media spin about subjects you don't remotely understand.

[JasonC]

Um, why do you think the government just added $250 billion to bank equity and started its offer to buy $450 billion in assets from them?

Addled brains looking for any stick to bash responsible authorities. Just spewing nonsense.