Posts Tagged ‘Toxic Assets’

Paul Krugman was on Jim Lehrer’s Newshour last night giving a very good argument as to why Geithner’s new plan to tackle Toxic Assets will not work.  It’s worth a view.


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The charges against John Gotti with which he was convicted: Murder, conspiracy to commit murder, loansharking, racketeering, obstruction of justice, illegal gambling, and tax evasion. Sound like we need to reduce his sentence. This whole “mortgage crisis” has had the hair on the back of my neck standing up for quite some time now, but I just couldn’t put my finger on it.

This is a bit complicated, and I may miss a detail or two, but try to follow me. Credit unworthy people borrow money for homes they can’t afford, using loans they can’t pay back. Banks are forced, through coercion by the Federal Government and groups such as ACORN to make these loans – knowing full well that they would be severely screwed in a recession. Attempting to abrogate their exposure, the banks package the loans into securities and sell them to a variety of investors and investment firms who then bundled them into main-street investments like 401k’s and pension funds. Mark-to-Market accounting rules allow these securities, which are difficult to value, to inflate the value of the investment and hence, the investment firm’s value and stock price. Now the originating banks are off the hook, as are most of the first purchasers of the Mortgage Backed Securities – and the average investor, thinking his retirement is safely stashed away in a growing 401k is completely unaware of the coming Apocalypse.

The market now begins a normal downturn. Housing prices have risen a bit out of control, so a correction is necessary (the “Housing Bubble”). The Media begins talking about a recession about every 15 seconds (before we are actually in one), which makes the problem worse and scares the crap out of investors, business owners, etc. who then roll the snowball a bit further down the hill. Meanwhile, Obama is raking in record amounts of campaign donations faster than Chucky-Cheese Schumer can get in front of a T.V. camera. But no one really knows where it is all coming from. Hmmm.

With the housing correction in full swing, an elevated foreclosure rate begins making the news. Foreclosures have a nasty habit of driving down the value of surrounding homes which rolls the snowball further down the hill. Banks, seeing the writing on the wall, begin holding on to their cash instead of loaning it out (the Credit Freeze). The investment firms are now caught by the dark side of mark-to-market rules and Section 475 of the IRS code which:

provides that qualified securities dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also provides that dealers in commodities can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions). (from Wikipedia)

Uh-oh. The investment firm’s value is now declining like Pelosi’s sagging chin. The falling value catches the eye of stock brokers and investors who begin pulling their money out. Again, the snowball is moved downhill – now about the size of house – and it has momentum of it’s own. Panic increases, the Media is now beating the drum of depression. Your average Joe checks his 401k to find that it has been reduced by a third.

Now the fecal matter really hits the rotary aero-oscillator. Investment firms begin clamoring for help, first from each other, only to find that they are all in the same boat, then the Federal Government, who graciously steps in with a large amount of funds called TARP. Since the Federal Government actually has no money of it’s own, it is forced to get it from taxpayers, the Chinese, other investors, and banks through FDIC fees. The whole time Obama’s coffers are growing – even Hillary is raising an eyebrow.

Mark-to-market is still doing it’s thing, devaluing everything in site. People are losing jobs and the economy is in a full-steam-ahead downward spiral. Obama gets elected. Investors fearful of the future with Democrats controlling everything, pull out of the weakened stock market which erases over a decade worth of growth. Since the money was actually imaginary anyway, just in the value of an intangible product, overall cash still exists keeping the dollar’s value steady. The problem is, where is it?

Why, it is still tied up ultimately in the mortgage backed securities, or so-called Toxic Assets, which no one can accurately value. But since their approximate value has dwindled, the cash supply is actually decreasing. So, fewer dollars covering the same goods means that the value of the dollar should be increasing. One effect of this is lowered oil prices, which all in all, is not a bad thing. The Chinese Yuan is cheaper, but the British Pound, as well as the Euro and the Ruble are getting more expensive. Hmm. Currencies go up when there are fewer units of them, and down when there are more units of them. Seems the Chinese are buying paper all over the place. They now hold almost $2 Trillion in foreign currency notes. But, because their currency is falling, it appears that they are printing money to keep buying the notes.

Enter the Stimulus Bill, TARP-2, and the half-trillion-dollar spending bill. Overall, about $2 Trillion more dollars. Again, money that must be borrowed or printed. We talk about “stealing from future generations”, which is true. Our children, and their children, will need to pay this debt somehow. But I’m focusing on following the money that is moving through the system. In order to pay out another $2 Trillion, we again must either print it (which would devalue our currency greatly, creating massive inflation and increasing our debt load tremendously), or borrow it (which will at best increase our currency value, at worst hold it steady).

The Chinese will probably buy our paper again, and print more money to make it happen. Look for a further decline in their currency over the next two years. But wait, if their currency would be directly buying the mortgage backed securities, and their currency is falling, then the value of those securities would be increasing. Since the Toxic Assets’ values are still falling…where is the cash going? The answer lies with the Stimulus Bill and the Fed.

In the meantime, home values, stocks, 401k’s, and corporate assets are still falling, so more cash is sublimating out of the system. However, the Fed is still pumping cash into banks and investment firms, literally into a black hole, so they can’t lend it out – it doesn’t actually exist. To add insult to injury, the FDIC is raising it’s required payments from banks to try and raise capital bled off by covering the consumer assets of collapsing banks. These values are not being recovered, so the snowball is now a full-force avalanche.

The combined wealth America produced over the last decade has been sucked down a rabbit hole and is being directly replaced with Chinese currency. However, they are holding all the cards. Since we are not producing as many goods to sell, eventually, the Chinese will want assets. The Stimulus money, instead of producing tangible assets, is being spent on some infrastructure improvements, but mostly squandered on benefits and entitlement programs, as well as the additional funds that will keep some of those lacking credit worthiness in their homes that they can’t afford.

So America’s accumulated wealth is being indirectly transferred to those in the bottom 40% of producers in an incredible money laundering scheme, by Obama and the Democratically controlled Congress – with some help from the Media. Future generations will not be footing that bill, they will be paying the Chinese to keep them from taking a quarter of the country as payment. If they can’t foot the bill, L.A. will probably become “New Beijing”. After all, all we will have left will be the Toxic Assets.

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