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Tempest245 · 05-02-2009, 19:19

Money, as in the actual currency is not destroyed, someone has it in their pocket.

Wealth, or Asset Valuation is what has been destroyed, if it ever existed. Homes, Businesses, Stocks, Commodities all got traded and borrowed against at highly inflated values, when the bubble bursts someone gets left holding the bag.....marking assets to market exhasberates it further.

It's all a big ponzi scheme....like musical chairs...whoever is left standing when the music stops ....gets to pay the bill.....The Taxpayer

Someone is sitting on the cash though...
China? Saudi Arabia?

**David M** · 05-02-2009, 19:26

The money is real alright. There are trillions sitting on the sidelines in more stable instruments until it looks like the worlds economy is going to turn around.

anotherT34C · 05-02-2009, 20:48

Quote:

Originally Posted by Tempest245

Money, as in the actual currency is not destroyed, someone has it in their pocket.

Wealth, or Asset Valuation is what has been destroyed, if it ever existed. Homes, Businesses, Stocks, Commodities all got traded and borrowed against at highly inflated values, when the bubble bursts someone gets left holding the bag.....marking assets to market exhasberates it further.

It's all a big ponzi scheme....like musical chairs...whoever is left standing when the music stops ....gets to pay the bill.....The Taxpayer

Someone is sitting on the cash though...
China? Saudi Arabia?

I think it's actually even worse than that. Looks like people 'invested' real wealth in the market. The brokers lied about their returns in order to pocket ever larger bonuses (% of reported return). The real wealth melted away into the pockets of the brokers, and the fantasy returns were the 'bubble' that inevitably burst. (Someone smarter than me, please explain how what Madoff did was really any different than what Wall Street did).

Of course now, our entire financial system is dependent on credit markets, and we have to swallow the bitter pill of bailing the rotten system out. I swear, it's like something from Futurama.

Who is sitting on the cash? Well, it looks like the brokers spent much of what was real. The rest was ethereal. And of course, the American consumer did their part by using their houses as ATM machines (spending the fantasy returns) to buy overvalued depreciating assets (like boats and SUV's).

I feel genuinely bad for the Chinese. They ran a current account surplus figuring that American assets were the safest in the world. In doing so, they effectively destabilized it by pouring in too much cheap credit. Now they're left holding a bag of assets that'll be at best, stripped by hyperinflation. At worst, they'll try and dump them, and then soon find out that the US government can print money faster than China can dump it. Financial detente.

TaoJones · 05-02-2009, 21:34

Quote:

Originally Posted by Tempest245

<snip>

Wealth, or Asset Valuation is what has been destroyed, if it ever existed. Homes, Businesses, Stocks, Commodities all got traded and borrowed against at highly inflated values, when the bubble bursts someone gets left holding the bag.....marking assets to market exhasberates it further.

<snip>

Mark-to-market accounting, by way of FAS 157, is the only standard that can bring transparency and truth to the shadowy machinations of the titans of American finance. The blinding light of mark-to-market accounting has revealed the true state of finance in this country, exposing the endemic corruption that lies at its core. Not surprisingly, the Princes of Wall Street fought its implementation with everything they had, and to this day continue to lobby for its repeal as if their financial lives depended on it. Hmmmmmm . . .

One of the key ingredients that led to the fine mess in which we currently find ourselves was the absurd concept of "mark-to-model" accounting that had, prior to FAS 157, been employed to assign valuations to derivatives.

What, you may be wondering, led to today's upturn in the stock market - especially the unexpected leap upward in the financial stocks? The mere whisper of a possible return to mark-to-model accounting. That would be a travesty, in my view, but the leeches of Wall Street can already sense fresh blood with mark-to-model's prospective return.

If everyone believes the same popular delusion - in this case, that worthless derivatives are worth what the creators and holders of same say they are worth - are we better off? Are the presently bankrupt financial institutions suddenly flush with capital by virtue of the fact that they're suddenly able to mark their "assets" to-model (valuation = 100%) instead of to-market (valuation = approximately 0%, as there is no market for this toxic junk)?

I prefer my reality unadulterated, personally, but I recognize that the revocation of FAS 157 would go a long way toward providing the naked emperors of Wall Street, the U.S. Treasury and the Federal Reserve Board, with a magnificent wardrobe of most impressive, if entirely fictitious, clothing.

For your further edification:

Mark-to-market accounting - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Mark_to_Model

TaoJones

**Wotname** · 06-02-2009, 01:04

Tao, I am not sure if I am smart enough to understand your post; are you saying that the Emperer does not have new clothes on?

svHyLyte · 06-02-2009, 06:47

Tao, et al--

The problem with Mark-to-Market is the fact that it doesn't make sense for certain large asset classes or for classes of holders for whom net realizable asset value to maturity, albeit discounted to present value perhaps, makes more sense. The Mark-to-Market rule is a snap-shot liquidation valuation that can fluctuate--wildly--from day-to-day, week-to-week, etc. and is really only useful in the valuation of a short-term trading entity. When applied to long-term investment entities, the rule is irrelevant unless it is coupled with regulatory capital requirements, in which case it becomes contra-productive if not a formula for complete disaster of the type confronting the US today.

A portfolio of mortgages--say a FNMA or FHLMC portfolio with a duration of 10 or 15 years, even with a prospective default rate of even as much as 10% to 15%--has a net realizable asset valuation that, particularly in today’s market, substantially exceeds its current "market" value. However, if a regulated holder is arbitrarily forced to adjust its balance sheet for the prevailing "market", it can suddenly find it fails to meet its regulatory capital requirement. As a consequence, an otherwise stable, cash flowing, institution is suddenly "insolvent" (which is screamed from the headlines) and forced to either raise capital in a depressed market (in which case the immediate prevailing trading value aspect of its holdings does come into play); or, the regulatory agencies assume control and liquidate the institution, in either case diminishing if not destroying the institution’s shareholders’ investments.

Given that understanding this subject requires rather more financial esoterica than a lay person might have at his finger-tips, a more tangible example of the situation can be illustrated with an every-day person's home or yacht financing.

When one buys a home or a yacht with a combination of cash and financing (equity and debt), before a prudent lender makes the loan, it wants assurance that the value of the collateral--the home or yacht--is at least equal to, if not greater than the proposed loan. That is, however, a one-time requirement. So long as it holds at the time of purchase, the lender makes the loan, the deal closes and everyone is happy, even though, over the “duration” of the loan, the value of the collateral may occasionally fall below the outstanding loan balance as markets ebb and flow. So long as the borrower continues to make his or her payments, however, the “market” is irrelevant.

Now consider the alternative of a lender that makes the same loan but as a condition requires that, at all times, the ratio of the collateral value (“marked-to-market”) must remain at the same level it was at the time the loan was originated and, if not, the outstanding loan balance must be paid down by the borrower.

Under normal circumstances that might not present such a problem. Then, however, something extraordinary occurs—say a hurricane Katrina. A lot of homes, or yachts, are destroyed in the neighborhood—but not our borrower’s. In the event, however, insurance suddenly becomes much more expensive, which reduces the pool of those capable of affording such a home, or yacht, and the pool is further diminished by the transient risk aversion that always follows such an event. Accordingly, there are few prospective buyers and the, then, “market value” of our borrower’s home, or yacht, is substantially diminished and no longer meets the lender’s loan-to-value requirement.

With this, the lender demands the loan balance be reduced with a big pay-down. “I can make the monthly payments but don’t have that much cash!” says the borrower. “To bad” says the lender. “If you don’t pay down the loan you’re in default and we’re taking over the collateral and selling it for what we can get.” If the lender does so, the borrower looses the home or yacht, and everything he/she has invested in it; and, the lender looses a relatively assured income stream and, likely, a sizable portion of the remaining loan balance—which it’s not likely to get back from the borrower (“Sue me!”).

This is exactly the situation we’re seeing today, writ large.

Where does money come from? It’s created, largely by the central bank ‘tho’ there are good arguments for doing away with that institution as it now exists, and particularly so given the ham handedness with which it has been managed in recent past and is certain to be mismanaged in future by the Obamanation.

Since John Maynard Keynes is now much in vogue, it might be worth repeating one of his more insightful observations in his old age:

"There is no harm in being sometimes wrong- especially if one is promptly found out." Let us hope...

s/v HyLyte

bastonjock · 06-02-2009, 07:12

thanks for all the info on what numbers add up to a billion and a trillion and quadzillion or what ever,i now know what Zimbabwe will be printing on their next currency issue

Charlie · 06-02-2009, 08:23

I have to agree with Hylyte on the problem of using Mark to Market valuations part on longterm held assets. It hink that the Mark to Market accounting needs to be tweaked to account for longterm perforiming assets. Using the M to M formula if a bank lends you $100k to buy a $200k house the day after they make the loan the loan is worth less. This requires the bank to increase its reserve requirements. So the bank is not interested in making loans anymore b/c once they make the loans the loans are worth less than when they were originally made. I agree with Tao Jones that the Mark to market does make things more transparent but the rule needs some tweaking on performing assets. On commercial loans I am required to send an income/expense statement to the bank on an annual basis. This coudl be used to "grade" a loan as to its performance and value.

bene505 · 06-02-2009, 09:38

Why not "mark-to-recent-market"? Say the highest value over the last 3 years. That way, when the value drops, there will be three years for the value to come back up, and if it doesn't come back up, then a three year advanced notice that there is a problem that needs to be corrected with in infusion of cash.

Palarran · 06-02-2009, 10:20

If any of you haven't followed the link that Captain Jaz posted to the Zietgeist video's you should watch them. A friend of mine showed them to me and at every turn I said "Bull Ship" and would check out the facts on wikipedia. I really couldn't poke a hole in it. Really makes you think.

LtBrett · 06-02-2009, 11:42

Quote:

Originally Posted by Tempest245

It's all a big ponzi scheme....like musical chairs...whoever is left standing when the music stops ....gets to pay the bill.....The Taxpayer

You nailed it. Currency is nothing more than a ponzi scheme. It has value because people believe it has value. Anyone here live in Brazil/ Argentina in the 90's? Really sucks when people lose faith in currency. Scary thing is, we are now massive "bagholders" because of just a few people with the power to fundamentally change our financial system. The knee-jerk pork-infested stimulus packages only add to the nightmare that will develop. Right now, we have huge deflationaly pressure, and the fed is trying its best to pump money in. But hold on, the whip saw is just around the corner. The roadblock is not a lack of money. It is a lack of liquidity. Low rates do very little when lenders are unwilling to lend without perfect credit, when companies (or stockholders) are afraid to buy other companies because of potential balance sheet land mines, and when consumers have drastically cut spending. When liquidity returns, get ready for one fierce jolt of inflation. Anyone still tracking the "misery index"?

Brett

TaoJones · 06-02-2009, 12:12

Quote:

Originally Posted by LtBrett

You nailed it. Currency is nothing more than a ponzi scheme. It has value because people believe it has value. Anyone here live in Brazil/ Argentina in the 90's? Really sucks when people lose faith in currency. Scary thing is, we are now massive "bagholders" because of just a few people with the power to fundamentally change our financial system. The knee-jerk pork-infested stimulus packages only add to the nightmare that will develop. Right now, we have huge deflationaly pressure, and the fed is trying its best to pump money in. But hold on, the whip saw is just around the corner. The roadblock is not a lack of money. It is a lack of liquidity. Low rates do very little when lenders are unwilling to lend without perfect credit, when companies (or stockholders) are afraid to buy other companies because of potential balance sheet land mines, and when consumers have drastically cut spending. When liquidity returns, get ready for one fierce jolt of inflation. Anyone still tracking the "misery index"?

Brett

It isn't necessarily a lack of liquidity that is the problem, it is a tremendous slowing in the velocity of money. The liquidity is there - the Fed and Treasury have been injecting it into the economy with abandon since August '07. The problem is that it's flowing like molasses in January.

However, those with huge stockpiles of capital and knowledge, such as Warren Buffet, are investing in the likes of Goldman Sachs, and the following is from yesterday's 5-Minute Forecast from Agora Financial:

"While traders are a mite cautious, value investors are diving in. Buffett’s Berkshire Hathaway has made two notable purchases this week.

"Yesterday, Buffett picked up $300 million worth of Harley-Davidson’s debt, which comes with a fat 15% coupon. And today, Buffett bumped about $2.6 billion into Swiss Re -- the world’s largest reinsurance business. Berkshire will get a 12% yield on this deal, with warrants to convert to stock three years from now… at today’s price.

"Buffett’s investment was announced moments after Swiss Re announced a $860 million loss for 2008."

And here's an amusing item making the rounds on the internet:

Sometime this year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers..

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. No, they are borrowing it from China. Your children are expected to repay the Chinese.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn’t that stimulating the economy of China?
A. Shut up.

TaoJones

DavidGC · 06-02-2009, 13:16

Where did the money go? Let's not forget that a lot of it is in the value of all of those houses that were bought by people who couldn't afford them, on terms that were sure to produce the exact result we experienced, with money given to them by banks who then bundled the risky loans and sold them off to other banks and companies. When the interest of those loans ballooned, the result was massive default --- and the walls came tumbling down.

DGC