It's not illiquid.

[John F]

I keep hearing these bailout pundits on TV telling me that the banking system is having a liquidity crisis. That banks are choked with illiquid assets.

No they aren't.

Truly iliquid assets are worthless. It means that nobody will buy it at any price. Any price.

Not all of the assets they hold are worthless. They are "illiquid" because they have dug in their heals and won't liquidate. They don't want to deal with the writedown which will show that they've hugely overvalued their balance sheets.

Illiquid asset argument, not true.
Illiquid market, also not true.

[Tom G. Laury]

Yeah if they were sold at open market the people able & willing would be getting JUST TOO GOOD of a deal. Also known as transfer of wealth. When the price of a home reaches the level that enough people can afford it, they will sell. Right now it certainly appears prices would have to drop substantially before that would begin.

[John F]

Just to make the point more clear.

It is not illiquid, it is overpriced.

Yeah if they were sold at open market the people able & willing would be getting JUST TOO GOOD of a deal. Also known as transfer of wealth.

Hi Tom, I don't understand this statement. I've read it a couple of times and I'm sure I'm just not understanding you.

But the real transfer of wealth happens if the government props up artificial prices by debasing our currency. The tax that isn't called tax.

When the price of a home reaches the level that enough people can afford it, they will sell.

I assume you are talking about downward pressure. Exactly right. Need to liquidate and can't find someone to buy your asset, then lower the price until someone is interested.

Right now it certainly appears prices would have to drop substantially before that would begin.

Yes.

[Tom G. Laury]

What I meant was just that the lending institutions holding for instance foreclosed mortgages are not willing to sell the asset, the home, for what it would bring in todays' market. You go to the auction, seller reserves right to reject...And they do if bid too low. So it sits. The snide comment about transfer of wealth is just that those homes have an intrinsic value which would probably be greater than the cash price today, so those holding the paper are loathe to take the loss.

[John F]

What I meant was ...

Thanks Tom.

[Tom G. Laury]

That's what is happening before our very eyes. Our stuff ain't gonna be worth much. Propping up paper won't matter either if nobody can acquire it and use it. What value then? We are quickly getting back to basics, for better and for worse.

[Ravenseye]

>Truly iliquid assets are worthless. It means that nobody will buy it at any price. Any price.

That's far from true. Actually, very few assets in banking are completely illiquid. I suppose I could sell the bank building that my bank is in and run myself out of business if I don't move or lease it back. I would increase my liquidity by converting a non-earning asset into cash but it's hardly a good move. So, bank building and fixtures are essentially, illiquid assets. If I hold a loan in my portfolio and it's a non-conforming loan...for instance, we gave you a loan to convert your backyard into a wind farm....and there is no secondary market, it's essentially an illiquid asset. Again, if I can't sell it to create liquidity, even if it's performing, it qualifies as illiquid. Unless, of course, I just foreclose on you and take the property. You wouldn't like that and neither would I because again, I end up with an illiquid asset and the bank really, really, really doesn't want the property. They want performing due notes.

>Not all of the assets they hold are worthless. They are "illiquid" because they have dug in their heals and won't liquidate. They don't want to deal with the writedown which will show that they've hugely overvalued their balance sheets.

Wrong again. We're required to mark to market on securities and we're required to NOT write down performing assets. Example. If we own ACME stock that we bought at $50 per share and now it's trading at $10 per share, we have to declare it in the portfolio at $10 per share. Even if it's trading at that level due to unique circumstances, perhaps because ACME has it's home office in an area just hit by a hurricane. We believe that the company will recover and, in fact, they still pay dividends. Nevertheless, we have to write down the $40 and mark to market. Our assets take a hit and our capital ratio sinks...all because someone DOESN'T want us doing what you're saying we do. Would we sell at $10? No...and you wouldn't either. But you don't have to take the write down. You'd just wait it out. No one would look at your balance sheet and ask questions. The balance sheet is not hugely overvalued...it was valued at the price paid for the asset or the market price. If you did a personal net worth, your calcs would be the same. Now, if it's a performing asset, we can't write it down. For example, if you take a mortgage with us for $500 thousand dollars and we book the loan, the asset is worth $500 thousand dollars. Each month, you pay off a little of the loan and the value of the asset goes down (for us..since we are due less from you). Should you live in a market where housing prices are correcting, the actual value of your home may have dropped significantly. But, if you're still paying on the mortgage, neither one of us will be forced to do anything. What's my alternative? If I re-appraise and find that your home is now only worth $400,000, you may have to pony up the difference because your mortgage arrangements required you and I to book a loan that was collateralized for at least as much as the note was worth. If I write down your my asset, I have to re-write the note and you may not have the cash to keep living there. My actions to effect the writedown that you talk about will trigger the foreclosure on your property. I would have a corrected balance sheet which solves the "hugely overvalued" issue that you raise, and you're out on the street. Why would you want me to do that if you're still paying on the loan?

So, you are right on one thing. There are plenty of illiquid assets in banking. But it's not solved by taking profit or capital hits to correct the value of an asset. Doing that solves no problem at all unless the balance sheets for everyone were corrected. I know plenty of people who just "know" that their home is worth every penny of what they paid for it but can't believe what other people paid (and financed) for theirs.

Market corrections correct everyone. Be careful of what you ask for. The real issue was inflated home values, slippery mortgage brokers and packaged mortgage backed securities out in the equity markets being snapped up by investors who believed it was their right to get a double digit return on every risky investment that they threw their money at. The issue was NOT portfolio Main Street bankers who took your deposits and gave you a mortgage and, like you, want to come out of this as whole as possible. Those bankers are your neighbors.

[Barry Digman]

Market corrections correct everyone. Be careful of what you ask for. The real issue was inflated home values, slippery mortgage brokers and packaged mortgage backed securities out in the equity markets being snapped up by investors who believed it was their right to get a double digit return on every risky investment that they threw their money at. The issue was NOT portfolio Main Street bankers who took your deposits and gave you a mortgage and, like you, want to come out of this as whole as possible. Those bankers are your neighbors.




Let's take that inflated home value idea a step further.

Say I'd like to buy a house priced at $200,000. I have 20% for a down payment, and can qualify for a 30 year mortgage at 7.5%. My monthly payment will be $1,118.

Now the world is becomes flush with cash that's looking for a place to earn some kind of return that outperforms savings and T-Bills and things like that. The banker or mortgage broker who wanted 7.5% last month is now willing to let me borrow at 6.5%, since his costs of borrowing have also dropped. Now the cost of that same loan is $1,011/month.

This kept happening until rates were as low as 4% or so for an ARM. My dream home would have cost me only $763/month for a couple of years. I was willing to do that because, as everyone knew, real estate always goes up and I can sell out if my situation changes, and I was comfortable at $1,011/mo.

Furthermore, that mortgage guy doesn't want 20% down any longer. In fact, he doesn't want anything down, and could apparently care less whether I'm really working. He took my word for it when I told him how much I made.

Now I get to thinking...I can afford a WHOLE LOT more house now, because I'm still willing to spend that initial $1,118/month. At the same time, the folks selling the house are wising up and figuring out that instead of 2 people wanting their house, now 20 people want it. Naturally, they begin jacking the price up until the last guy standing in the bidding war gets to sign on the dotted line.

Pretty soon, that house that was $200,000 is $250k, then $300k, then eventually $500k because the market can afford it, and the market has a funny way of moving prices to absorb the cash homebuyers are willing to spend. The huge mistake in all of this, of course, was that Bubba didn't take the house he originally wanted at $200k, he went out and bought the most expensive thing he could "qualify" for. It was at this point that people began to realize that there's a critical difference between "qualify" and "afford".

You know the rest of the story. But the basic point was the inverse relationship between purchase price and the cost of borrowing (interest rates). That clever market will ALWAYS find a way to accomodate the extraction of the maximum amount from your housing budget, (or car budget, or furniture budget). Anyone remember being able to buy a beautiful new 3bd/2ba home in a nice neighborhood for $59,900, at an interest rate of 15%-18%?

[Ravenseye]

Barry, you're right. Along with that, the home became the ATM for the homeowner. Pull $50K out and buy a boat or put in a kitchen to show off to your neighbors. All that works until the perceived value drops. How much is that granite countered, fancy kitchen worth now? The food cooked tastes the same no matter what. Along the way, if your bank said, "Hey, we're not giving you more money because we think it's a bubble and, if we do, you'll pay up for it", the borrower was out of there in a flash. We saw people applying online to four or five institutions or brokers a day trying to flush out a low interest rate deal that also allowed them to pull cash out of their home. First deal took the ink. Didn't matter to the borrower if it was a bank, broker or finance company. Many didn't care and many still don't know the difference. All they knew was that if they couldn't get another quarter of a point with their bank, then their bankers were jerks and off they went. TONS of those folks are back at small banks today after finding out that conservative underwriting, like conservative borrowing, keeps a roof over your head. I always remind these folks that if their initial investment doubled and then halved, they haven't lost a dime. Not a thin dime. People seem to forget that having money, making money and earning money are all different things. I'm always stunned when people get 15% on their 401K and don't worry about how it happened. Take 15% away and they want to blame it on someone.

[Barry Digman]

Didn't matter to the borrower if it was a bank, broker or finance company. Many didn't care and many still don't know the difference.


As far as most of the public is concerned, if you can borrow money from it, then it's a bank. If they knew back at the peak of the real estate boom that the guy who was evaluating their creditworthiness was a bartender the day before, they would have begun to figure out what was going on. But as long as everyone was getting what they wanted out of the market, no one really cared.

I was in my hometown bank last week visiting with the president. He wanted to know how my business was doing, and I also asked how the bank was doing. He stuttered and stammered and kinda looked at his feet. I finally laughed and said "Dave, you guys are making so much money you're embarassed to talk about it aren't you?" He got a kick out of it. Seems to me that the smaller regional and local folks are doing fine, and were largely unaffected by this mess because of, as Ravenseye points out, common sense banking practices.

[John F]

Hi Ravenseye,

Thanks for the post. I understand what you've written and agree fully but we are talking about a couple of different things. It's my fault really, Apparently you hadn't read the article that I was ranting over... :)

>Truly iliquid assets are worthless. It means that nobody will buy it at any price. Any price.

That's far from true.

No it isn't. [and you actually agree with this in your post by using terms like "essentially" and "if there is no secondary market"] Here's the deal: You are a banker (sounds like this isn't much of a stretch) and you've agreed to some commitments, through contracts of one sort or another, that you absolutely must meet and you have no cash. Any regular business would now have to look at liquidating whatever they had; for example, the essentially illiquid assets. You decide instead to claim that none of your assets are liquid because there is no secondary market at a price that makes sense. These big Wall Street etc. are claiming just this.

In your example, you mention making me a loan to build a windfarm in my backyard. You suggest that this may be essentially illiquid. If you were in a bind I guarantee that there is a price where I will buy it back. If it has value, there is a secondary market at some price.

You can claim it is illiquid but it isn't.

Something that is truly illiquid has no market at any price.

A true timed savings account, a certificate of deposit, a EE series savings bond; all things that are essentially illiquid but suddenly become liquid in bankrupcy court.

>Not all of the assets they hold are worthless. They are "illiquid" because they have dug in their heals and won't liquidate. They don't want to deal with the writedown which will show that they've hugely overvalued their balance sheets.

Wrong again. We're required to mark to market on securities and we're required to NOT write down performing assets.

But you aren't distressed. If you were and had to liquidate some assets to cover commitments the real value of those assets suddenly becomes real and the value of your balance sheet can't lie. If you sell it, you have to book it.

These bankers know that the street value of this stuff is really low and its better to claim them illiquid and cry for a bailout then liquidate and deal with the bankrupcy or ailing balance sheet.

You are talking about how bank assets are valued and I'm talking about how assets are valued when liquidating a failed business. As long as these banks keep the rules you show, they don't have to come to grips with being failed.

Example. If we own ACME stock that we bought at $50 per share and now it's trading at $10 per share, we have to declare it in the portfolio at $10 per share.

So does every other holder of ACME.

Nevertheless, we have to write down the $40 and mark to market. Our assets take a hit and our capital ratio sinks..

Just as it does for me, the private holder of ACME.

all because someone DOESN'T want us doing what you're saying we do.

And you hit my nail for me here. I am not attacking you or the accounting of banks in general. I am attacking the banks claiming that they can't make commitments because they are holding illiquid assets; they are overvaluing their assets on the books and if they did what any other business or private person had to do they would devalue their balance sheet and expose that they are bankrupt.

I didn't mean to use the term write down here, I should have said devalue.

For example: I claim my $50 EE savings bond add $50 to my net worth. (hold to maturity) If I were in trouble and had to make it liquid, say four days after purchasing it, it suddenly loses a little over half of its value to my net worth and only cover a bit under $25 of my commitment.

Would we sell at $10? No...and you wouldn't either.

I would if I had to to make a commitment, and so should you. Not only that, I can be put in a position where I have to.

But you don't have to take the write down. You'd just wait it out. No one would look at your balance sheet and ask questions.

That certainly depends on who I show it to. If I stopped in one day and wanted to get a loan against my ACME holding would you value using market value or my basis? I don't see you distancing my argument here. What is the value to a distressed business that needs to meet commitments? Is it different for John's Private Investments or John's Big Bank?

The balance sheet is not hugely overvalued...it was valued at the price paid for the asset or the market price.

I doubt you would consider my argument of basis.

If you did a personal net worth, your calcs would be the same.

Do you mean I wouldn't consider the market value of my ACME holdings?

For example, if you take a mortgage with us for $500 thousand dollars and we book the loan, the asset is worth $500 thousand dollars. Each month, you pay off a little of the loan and the value of the asset goes down (for us..since we are due less from you).

Of course. The asset is the note. It get's its value from my commitment to pay it. The house is a secondary concern and binds me to the promise.

... If I write down your my asset, I have to re-write the note and you may not have the cash to keep living there. My actions to effect the writedown that you talk about will trigger the foreclosure on your property.

Like I said, I shouldn't have said writedown. This example of your's is really far from my rant. I get the feeling that if you were stuck to meet a commitment then you wouldn't sit on you balance sheet and cry illiquidity.

I would have a corrected balance sheet which solves the "hugely overvalued" issue that you raise, and you're out on the street.

Actually this isn't the hugely overvalued issue I am raising. I am talking about the businesses on Wall Street that claim they can't make their commitments and are blaming it on illiquidity when what has really happened is they have overcommitted and should lower the price of their assets (which, if they have any value, are liquid) and take the balance sheet hit that they loathe.

Why would you want me to do that if you're still paying on the loan?

I wouldn't and I think the note is worth whatever our agreement said its worth. Remember, the note is the asset, not the house.

So, you are right on one thing. There are plenty of illiquid assets in banking.

You haven't convinced me I've been wrong on anything and strangely the one thing you consider me to be right on isn't anything I've argued.

There are no illiquid assets in banking. Banks don't like worthless things. Those things you are calling illiquid are only "essentially" illiquid and if push came to shove your bank, like any other business or person, would liquidate them. Or at least I hope you would, some banks think they shouldn't have to.

Market corrections correct everyone. Be careful of what you ask for.

True enough and this is the only way to correct it. Faking it didn't happen or inflating the currency and stealing from everyone to cover up the malinvestment is not the answer. The malinvestment must go somewhere and socializing it only promotes it.

The real issue was inflated home values, slippery mortgage brokers and packaged mortgage backed securities out in the equity markets being snapped up by investors who believed it was their right to get a double digit return on every risky investment that they threw their money at.

Don't forget the laws of supply and demand. Those inflated home values and mortgages happened because of actions of both buyer and seller. I sort of make an argument in another thread that simplifies the machine behind the appreciation and shows a bit how that happens. People who bought homes also expected some pretty high returns and this too shows in the values.

The issue was NOT portfolio Main Street bankers who took your deposits and gave you a mortgage and, like you, want to come out of this as whole as possible. Those bankers are your neighbors.

I know. My wife is a banker. I have banker friends. I agree. Especially if the bank books their loans.

[EDIT] Holy Cow! This is long. This has to be a record! (well, probably not for me. :))

[John F]

Seems to me that the smaller regional and local folks are doing fine, and were largely unaffected by this mess because of, as Ravenseye points out, common sense banking practices.

So far this seems true. In fact, deposits are really growing if you have a Wachovia or (defunct) WaMu nearby. The issue recently has been cash on hand as a lot of folks are grabbing some cash just in case. This problem is probably over now, given that the bailout/no bailout question will be answered and regardless of the answer will probably put many folks at ease.

The holding company for my wife's bank had some holdings in Freddy and Fannie and dumped them a few months before they tanked. Good move.

[tecumseh]

johnf writes:
Illiquid asset argument, not true.
Illiquid market, also not true.

tecumseh: you seem to be a bit confused here johnf since your understanding of these kinds of issues seems a bit constrained (hope it does not apply to you but read the last paragraph).

most folks do have some problem (and I can't figure out why) with discriminating between the ideas of liguidity and bankruptcy.

the latter seems to be more of what your are describing... ie an asset (or usually a group of assets) is worth less that the obligations of creditors.

liquidity (conversion to cash or cash equivalents) is defined given some stated time interval (time horizon)... ie how quickly can some asset be converted into cash. some KINDS of assets may be more liquid while others (essentially due to the time and or legal required to transfer an asset be less liquid) are less liquid.

by the nature of the asset involved (ie a home) they HAVE ALWAYS been considered to be less liquid.

the asset side of a balance sheet list asset in accordance with their degree of liquidity (liquid assets first followed by assets which are increasingly less liquid).

I have heard one or two comments (pundits of various quality) in recent times suggest that banks are having liquidity problems and as described sounds like a rephasing of a classical keynesian liquidity trap.

in addition it is quite evident to me that some folks of some far leaning political disposition do have some resistance to recognizing (de-nile) that markets do fail. my quess is most so called (by me) MARKET TRUE BELIEVERS will go to the poor house still having full faith that market have always and will always work even though theory and evidence suggest other wise.

[John F]

tecumseh: you seem to be a bit confused here johnf since your understanding of these kinds of issues seems a bit constrained.

Only by reality t.

most folks do have some problem (and I can't figure out why) with discriminating between the ideas of liguidity and bankruptcy.

I do not believe I have any such problem, but it may be true.

Let me describe what I am saying in a different way.

I have made a commitment with you and owe you $100K right now. The only asset on my balance sheet is my home at $200K. I think we can both agree that by my balance sheet I am not bankrupt and that in this current housing market my asset is, by definition, illiquid [essentially].

I could write you a letter and tell you that I am sorry that I cannot write you a check as I have no liquidity. Sorry. [You probably won't like that.]

I could offer you a half share in my house. That clears both of our balance sheet transaction. Game? Probably not because you most likely need the cash as you have liquidity concerns of your own.

I could cry to the government and get it to purchase the house from me with money created by debasing the currency, in effect, by everyone holding dollars. This one is best because to get here I probably have some say in the price I sell it at so it would certainly be enough to cover my commitment with you and some left over so that I am still in the game.

I could auction my house to the highest bidder. Presto magico my "illiquid" asset liquidates. If I cover you and have some left over then I wasn't bankrupt, if not, then I was. We both agreed that I wasn't backrupt and that my asset was illiquid but in this scenario I show that that assumption is false.

the latter seems to be more of what your are describing... ie an asset (or usually a group of assets) is worth less that the obligations of creditors.

Well, no. This would be obvious bankrupcy and nobody would let them hold up the system. These bank are sitting on big balance sheets and declaring that their assets are illiquid so there is no liquidity in the market. Instead of taking these asset to market and finding out what their current "mark to market" value really is they are holding you (and me) hostage, holding out for "hold to maturity" value.

None of the stuff on their balance sheet is truly illiquid except the stuff that has no value at all.

liquidity (conversion to cash or cash equivalents) is defined given some stated time interval (time horizon)... ie how quickly can some asset be converted into cash. some KINDS of assets may be more liquid while others (essentially due to the time and or legal required to transfer an asset be less liquid) are less liquid.

If I get myself into a liqidity trap then the judge will see to it that I become instantly liquid. No matter the asset. I have seen estate sales where tractors sell for tens of dollars.

by the nature of the asset involved (ie a home) they HAVE ALWAYS been considered to be less liquid.

Sure, in all normal business decision logic. Up until the business has trapped its liquidity. Then the business must make it liquid. At the market. No special considerations.

in addition it is quite evident to me that some folks of some far leaning political disposition do have some resistance to recognizing (de-nile) that markets do fail.

<sigh> This isn't politics. This is market theory. How can a market fail?

my quess is most so called (by me) MARKET TRUE BELIEVERS will go to the poor house still having full faith that market have always and will always work even though theory and evidence suggest other wise.

Theory and evidence suggest no such thing. State the theory and show the evidence.

[Ravenseye]

Hmmm...nice post John F. I'll toss in one more thing. If I decide to call a note (and, while you say the note is the asset, it really isn't. You can't sell your note nor can I if I decide to foreclose), you have a leg to stand on. I can't do that unless you break a promise or I go into receivership. In the meantime, we stay friends, month to month. I cannot sell your loan unless I've told you that I may do so. Currently we do not. Our customers come to us because we don't sell on the market. They don't want non-bankers involved in their finances. And, I cannot sell our building without regular approval. In fact, I'm restricted from owning real estate that's not used for banking nor leasing real estate that I don't use for banking. That makes landlords pretty wary. My goodwill is an illiquid asset until the time I write it off. In todays economy, no one would spend the goodwill that I spent on my insurance agency but, because the value of the agency exceeds the goodwill amount, I can book it. Should I sell the agency I would have to write it down. So, if illiquidity is nullified by the banks ability to write a loss, then nothing is illiquid. In reality, only dead businesses have this condition.

Your post, no matter how long, was worth two reads. Next beer is on me...I'd love to chat about this. Best of luck...really...best of luck to your and your wife. Times like this are rough. I wish you the best. Let me know if there's anything I can do!

[George Fergusson]

Your post, no matter how long, was worth two reads.

They usually are. I've learned from this exchange. Keep it coming.

[tecumseh]

johnf writes:
I could write you a letter and tell you that I am sorry that I cannot write you a check as I have no liquidity. Sorry. [You probably won't like that.]

tecumseh:
well actually this was not so uncommon when I did loan money. as long as you (as a loan or bank officer) thought the individual who borrowed money from you was being upfront the typical response (from the bank) was to restructure the loan payments. of course in those days we kept our own paper... so we didn't intentionally make bad loans with the idea of sluffing the bad paper off on others.

then johnf writes:
If I get myself into a liqidity trap then the judge will see to it that I become instantly liquid. No matter the asset. I have seen estate sales where tractors sell for tens of dollars.

tecumseh:
first off johnf people are not the subject of a liquidity trap... this applies to groups of people (or markets).

then johnf writes:
<sigh> This isn't politics. This is market theory. How can a market fail?

tecumeh:
as you of course know johnf I do believe it is not that easy to cleave politics and economic. the idea of doing so is a pure abstraction imho.

market have and will fail... placing one's faith in markets (sound to me a bit like worshipping a golden calf?) will not erase the fact that market's do fail.

then johnf writes:
Theory and evidence suggest no such thing. State the theory and show the evidence.

tecumseh replies: well as I previously suggested johnf your understanding of these things seems a bit limited. for certain if you only reference long dead over simplistic austrian economic philisophers (long since considered trival and incorrect) then of course your understanding make all kinds of sense. like the man said... simple but wrong.

on the other hand... all you might need do is to consider the ASSUMPTION of market theory to understand that a good number of these ASSUMPTIONS are not now, nor will they ever conform to the real world.

there are any number of historical references to market failures (we have discussed these failures before, but you seem to consider these failure to be theoritical abstractions?) typically attributed (by economist) to the failure of one or several of the above alluded to ASSUMPTIONS or when the system does not work as everyone (economist) thoughtt.

the assumption never seem to redefine themself, although system failure often time lead to folks rethink and rephasing how the system works.

I would hope that by now johnf you might understand that my above response does not mean that I in any way or form believe that markets never work or haven't worked to some degree.

once again... placing ALL one faith in markets does paint a person as a TRUE BELIEVER and incapable of recognizing when a system does or has failed.

[John F]

If I decide to call a note, you have a leg to stand on.

I took the parenthetical phrase out and I'm not understanding you.

(and, while you say the note is the asset, it really isn't. You can't sell your note nor can I if I decide to foreclose)

I certainly can't because you have title. Also, interesting point, I didn't consider the case where the contract of the note limits title. (Duh!) In that case the note is valuable only to you and therefore illiquid (and not worthless). I guess I didn't imagine that those yahoos would write that kind of paper.

If they did then I feel even stronger that they should be left alone to fail.

Currently we do not. Our customers come to us because we don't sell on the market.

Acceptable free plug. I would bank with you. (of course that's assuming we have to have banks... :) )

[John F]

johnf writes:
I could write you a letter and tell you that I am sorry that I cannot write you a check as I have no liquidity. Sorry. [You probably won't like that.]

[Ah, see if this changes it for you a bit] There is an implied "So I'm not going to pay you, ever." in that one.

first off johnf people are not the subject of a liquidity trap... this applies to groups of people (or markets).

It was a rhetorical device. Rephrase to "If I find myself without liquidity..."

as you of course know johnf I do believe it is not that easy to cleave politics and economic. the idea of doing so is a pure abstraction imho.

As to the cleave comment, we agree in the context of current political systems. It wasn't all that long ago that monarchys were the only political systems on the planet. Have faith that humans learn and improve. As to the abstraction comment, abstraction isn't a bad thing.

market have and will fail... placing one's faith in markets (sound to me a bit like worshipping a golden calf?) will not erase the fact that market's do fail.

tecumseh replies: ... does or has failed.

So then what you are saying is that you don't know the failed theory or have an example of a failed market.

It's fine that you have an opinion and all but unless you are going to be specific it's pretty hard to have a debate.

[Ravenseye]

Sorry John. What I was trying to say in my terribly constructed sentence was that you would have a leg to stand on if I tried to liquidate the note that represented your mortgage. There would have to be performance criteria that would allow me to trigger that call. In the old days, a note could be called at any time. Not today. It's actually one of the reasons that mortgages are securitized, packaged and sold off. A bank may love to have a local and performing portfolio but getting out from under with today's consumer protection laws can be costly. So, even if I needed the liquidity that your payoff would represent, I couldn't easily get it. Many under-performing banks find themselves in a "regulated liquidation" which allows whoever the regulator is to "fail" the bank simply so that the assets can be purchased by another institution. Without the regulator intervention and without a clause to the consumer stating that the bank may choose to sell the asset, it stays on the books.

[John F]

What I was trying to say ...

Ah, excellent, and thanks, this is a really good description of why it's done.

[tecumseh]

johnf writes:
So then what you are saying is that you don't know the failed theory or have an example of a failed market.

tecumseh replies:
not at all johnf and I am not certain why what I have written might make you think what you have suggest above???


I have suggest two reasons why market theory does not always conform to reality. this is pretty much in complinance with the take of keynes who qualified his 'answer' oh why market do not self correct by first stating that 'this is a possible explanation rather than this is THE answer.

market failure (direct evidence of market failure) are numous. you seem to be denying this while looking at one directly in the face.

previously you seemed to have suggest that the great depression was a mirage also...

I suspect that most Market True Believers (hope this description does not apply to you) will watch this collapse while despising their own 'lying eyes'.

most folks that just KNOW the outcome of some event are quite unlikely to witness anything beyond what they know has occurred.

[John F]

not at all johnf and I am not certain why what I have written might make you think what you have suggest above???

Because you did not identify a theory that has failed or evidence that a theory that has failed.

you seem to be denying this while looking at one directly in the face.

I take this sentence to mean that you believe the current economic downturn is a market failure. Au contraire mon frère! What we are seeing is the market working perfectly. What is happening is a good thing and if we don't meddle and prop up the overvalued malinvestment we can flush the poor business decisions down the tubes and get back to business that makes sense.

What is happening is good, getting to what is happening was bad decision.

previously you seemed to have suggest that the great depression was a mirage also...

Not at all. What happened was not a failure of market economy.

I suspect that most Market True Believers (hope this description does not apply to you) will watch this collapse while despising their own 'lying eyes'.

The only thing to dispise is that we allowed a small group of folks the power to meddle in the process.

most folks that just KNOW the outcome of some event are quite unlikely to witness anything beyond what they know has occurred.

Some things are knowable, for example:

There is a limit to the resources of the earth.
The population of the human race cannot grow perpetually.
And from these we can deduce that any system that depends on the above is doomed to failure. What noone can tell is when it will fail.

I know our monetary system will fail. It has to. I just can't predict when.

[John F]

What I'm trying to say in a more professional article... [borrowed from Dragonfly in another thread]

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview (http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview)

Excerpt:


If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.


And:


Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.


finally, and most directly:


If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

[George Fergusson]

Here's the solution to the liquidity problem. I'd call it "Mark to Imagination" :)

Sure beats mark to market..

SEC, FASB Said to Issue Guidance on Fair-Value Accounting Rules

By Jesse Westbrook

Sept. 30 (Bloomberg) -- The U.S. Securities and Exchange Commission and the Financial Accounting Standards Board may issue additional guidance on fair-value accounting rules, people familiar with the matter said.

The SEC may say companies can rely more on assumptions such as expected cash flows in assessing how much assets are worth, said the people, who declined to be identified because the plans haven't been completed. The guidance pertains to a requirement that banks review their assets each quarter and write them down if values have declined.

The SEC and FASB will probably resist calls from some members of Congress to suspend the accounting rules, the people said. SEC spokesman John Nester declined to comment.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aF7mM2z4swgU&refer=home