Not Even Our Worst Banking Crisis Of The Last 30 Years (The effect of mark-to-market)

Vanity | 10/2/08 | Lee Roggenburg

[LRoggy]

Sorry for the lack of spacing in the EMTA.org, it looked fine when I cut and pasted into Word first.

[nicola_tesla]

But rest assured, the size of the crisis was just as large back then as it is today.

No it's a much MUCH larger problem today because of the derivatives. But Paulson's plan is NOT the answer. It will just worsen the problem.

[SueRae]

ping for later

[AndyJackson]

The thesis of the article is BS. We have $62T in public, personal and commercial debt outstanding. It is a HUGE crisis, and an inevitable one. It was going to come crashing down sooner or later as this correction has been looming for a decade or more.

[LRoggy]

The thesis of this article is that we have a perfectly reasonable model to work with to get ourselves out of this mess.

The Brady Plan did work.

The debt ratio to assets of this country are much healthier than almost all the other countries of the world.

I am astonished you could make such a statement. A Balance Sheet has three components, not one. To reference debt in a vacuum without showing assets and net worth is ignorance.

[NYCRebublican]

We also have over $200 Trillion in Capitalized Assets - ($50 Trillion in homes alone). That gives us shareholder's equity of over $140 Trillion or almost $500k per capita.

The main issue here has been the mark to market nonsense. If there is no current market for an asset due to any number of reasons in including fear, panic, lack of information, seasonality etc, it is ridiculous to force any institution to value that asset on the current days bid. This rule needs to be revisited and altered significantly. This seems to be getting the least amount of attention of all the issues we are facing.

[AndyJackson]

You are a clueless idiot.

First the most important things on a balance sheet are income and outgo. Whimpy cannot trade his suit to repay his hamburger debt.

Second, the problem with estimating our assets is that you cannot liquidate the assets of the US to pay $62T. Third, the $62T needs to be compared to GDP which is about $13T. Reasonable principal and interest on $62 T would be about $6.2 T per annum (sort of like a mortgage). That is almost half of GDP. Fortunately a lot of that is just transfer payments from working people through WS and back to themselves in their 401K, pension funds, etc. But a significant fraction of that $6.2T is one group living off of the work done by the rest of us.

[LRoggy]

You are a clueless idiot.

First the most important things on a balance sheet are income and outgo.

---

That is an Income Statement, not a Balance Sheet. Who’s the clueless idiot now?

[refermech]

I don’t know much about economics but for many years I have thought that many people living well beyond their means would be the downfall of our great country. We will not be able to spend our way out of this one and I fear this bailout is throwing good money after bad. Somehow though we must not let our banks fail. How to do it? Or do we simply have to go bust, pick up the pieces and start over. As much as I hate to say it
I believe this is what is going to happen. It could get ugly. Especially with obama and a democratic congress.

[VRWCmember]

You are a clueless idiot.

First the most important things on a balance sheet are income and outgo.

Pot, meet kettle.

There is no Income account on a balance sheet, nor is there an "outgo" account on a balance sheet. A balance sheet only reflects the current BALANCE (hence the name) of the various accounts on it as of a given point in time. Furthermore, the two sides of the balance sheet must be in BALANCE (again hence the name). The two sides of the balance sheet are the Assets on one side and Liabilities and Equity on the other side.

The financial statement(s) that have items most closely resembling the "most important things on a balance sheet" that you cited are the Income statement (revenue and expenses) or the Statement of Cash Flows (Sources of cash and Uses of cash), but even those statements do not have an account called "income" or "outgo".

[VRWCmember]

First the most important things on a balance sheet are income and outgo.

Andy, is your real name Senator Biden?

[AndyJackson]

You are an idiot if you want to run a semantic argument with any one of the 75% of Americans oposing this bailout about what you call what normal folks have to do every day. Whatever you accountants want to call it, every responsible household ensures that its income exceeds its out go, biweekly, monthly, quarterly and annual income exceeds expenses, cash on hand is trending up rather than down. Every healthy operating organization does the same. Sure, you can take a time out when you are building a new capability that is not yet operating, but once it is up and operating, the VP incharge gets fired pretty quickly if cash coming in does not start exceeding cash going out (including principal and interest payments pretty quickly).

You see, where you are wrongheaded is that you are just like the political idiots who got us into this mess, and a lot of other overleveraged idiots who collectively got the country into this mess. You are trying to justify borrowing against assets, not for capital investments, but to pay current acounts.

History shows it is a disaster every time. Adam Smith already covered the issue in great detail

Yes, you may be an accounting sophisticate, but you are an economic idiot.

[AndyJackson]

We also have over $200 Trillion in Capitalized Assets - ($50 Trillion in homes alone). That gives us shareholder's equity of over $140 Trillion or almost $500k per capita.

All based upon self-referential pricing inflated by the leverage used to run up the valuation of these assets.

For instance, I a house, which today is valued at 3 times what I paid for it in 1999. But that is as a result of Greenspan/Bernankes post 2001 housing bubble. That bubble is bursting. My house is not actually worth 3 times what I paid for it based either upon normal cost of labor and materials to replace it, or based upon what mortgage can be supported by average incomes in my neighborhood.

Or, look at it from the standpoint of cost of maintenance. Say you allowed 5% cost of maintenance / operations on the so-called $200T of assets, which is a pretty low annual cost, actually. that would be $10T per year which is 80% of GDP. Now, we may think we have $200T in assets on the books. The notiong that we have $200T in productive assets is absurd.

[Toddsterpatriot]

I am so tired of having to give you children lectures on fundemental economics.

First the most important things on a balance sheet are income and outgo.

The hits just keep on coming. LOL!

[AndyJackson]

The reason why you and this VRW idiot smug hypersophistated permatouts were so wrong about this mess a year ago is that you guys completely overlooked very basic economics fundamentals. VRW idiot claims to be an economics professor, so I am sure he is completely familiar with the writings of Adam Smith, who has a wonderful section in his book, 200 years ago on the dangers of financing current expenditures by borrowing against assets. Of course Adam Smith didn’t know about default swaps.

[Toddsterpatriot]

The reason why you and this VRW idiot smug hypersophistated permatouts were so wrong about this mess a year ago

What was I wrong about? Be specific. Links to actual posts would be good.

[VRWCmember]

You are an idiot if you want to run a semantic argument with any one of the 75% of Americans oposing this bailout

And you are even more ignorant than I thought if you think that I, or the author of the article, or the FReeper who posted it want to argue with the 75% of Americans opposing this bailout. The point of the article and the point raised by the other poster is that there is a workable plan that was used 30 years ago that was not even considered instead of this bailout plan. I might have been giving you too much credit when I mistook you for Senator Biden.

[VRWCmember]

From the article:

There are lessons in the Brady Plan that can be applied today. One is that, as painful as the bailout is to our sense of free markets, sometimes as Americans we know that pragmatism needs to win out over ideology. Another is that private market solutions to work these problems out can work, but most likely need the ‘imprimatur’ of a government guarantee behind them for markets to give the workout a chance to work (which is why some form of the Republican alternative is worth exploring). It is too bad that Hank Paulson didn’t bother to have read the details of the Brady Plan before he came up with his first proposal. By trying to put together a Bi-partisan political coalition before he had spent a few days researching this relatively recent solution, he put the ‘solution train’ on the wrong track, by allowing the same people who oversaw the disintegration of Fannie and Freddie to be given far more input at the beginning than they warranted.

If the leadership of this country resides in the hands of Nancy Pelosi, Harry Reid and Barack Obama in the future, then we might look back at this time as the period Hank Paulson panicked the country into voting that way.

Now granted, this was at the end of a pretty long article, and there weren't any pictures so you might not have read this far, but it should be pretty clear that the point of the article is that this crisis is NOT as bad as is being hyped by political leaders and the media, and if a government intervention is needed it would be best if it were at least based on a model that has worked before.

[AndyJackson]

I will agree that the solution then is one that should be looked at here, instead of just borrowing $700B to get us out of the debt problems we already have. I think, however, that that the problem we have is of a proportion not see recently.

The kind of debt / income ratio we are sustaining now is similar to that post WWII. But then, we were coming off of a war, and bringing idled or misallocated capital, raw material and labor resources (because they were making things that were meant to be blown up had no long term value to the economy) back to the a productive economy. This time, however, we have run up this debt in a civilian post Cold War context, and don't have new additonal resources that will come on line to pay down the debt.