Fed Creates $1 Trillion 'Out of Thin Air"

[Piggy]

But you are now saying that he could pad the asset list with imaginary value without any cash, buildings, etc. This would indeed be "creating money". It would as far as I am aware be way, way outside the allowed bounds of GAP (generally accepted accounting principles) and thus would not withstand any accountant's audit.

Well, that question comes down to how you "mark" such an asset.

The loan you hold is an asset, just like a bond is -- one day you'll get something from it, unless there's a default. If you don't allow institutions to count loans, even risky loans, as some sort of asset, then their balance sheets become deceptively low.

The question is, how much is it worth?

Your choices are "mark to market" (the value you could get if you had to liquidate right now) and "mark to model" (the value you predict you'll get based on your projections over time).

Enron used mark-to-model to inflate its books. It created high-risk ventures and then predicted outlandish profits from them and treated those profits as if they were assets, thereby hiding their actual (real and current) losses by padding the books with "assets" which were nothing more than figures picked out of the air.

So what we have now is a standard mark-to-market valuation. The banks are protesting this b/c they say it forces them to undervalue their holdings, given that some portion of those holdings certainly do represent higher realized value over time.

But no one wants to re-open the floodgates of mark-to-model.

I would be interested to know how the securitized-against-potential assets were valued. [ETA: I'd guess that the value was marked at the insured amount, which one would assume could be realized in case of default -- but of course the insurance companies did not have the assets to back all of their insured securities if everything went in the tank, which it did.]

Anyway, yes, you have to have some means of allowing a held loan to be counted as an asset.

Once you do that, you necessarily allow banks to generate further loans against that asset base. If you did not, then banks would stop making loans.

So once again, we see that the problem was not in this or that part of the system -- it was in the collective consequences of what the entire system was allowed to do.

 

[Piggy]

So are you implying that betting on the future when insurance against future losses is in place does in fact fall within the allowable range of activity of a fiduciary agent?

Yes.

 

[mhaze]

Yes.

I strongly disagree but this would be a point of state law, not federal. If my IRA or 401K had been lost or marginalized in such a scheme I'd immediately bring a case of action against the fiduciary agent, given the circumstances as above described. No hesitation whatsoever.

It wasn't in such hands because I took it out of the hands of the line of guys in suits in skyscrapers some ten years ago.

 

[Piggy]

I strongly disagree but this would be a point of state law, not federal.

But wait a minute... where do you see the illegal activity?

All investing is betting on the future.

For a fiduciary to "bet on the future" with the added guarantee of "insurance against future losses"... how can that possibly be a breach of fiduciary responsibility?

Maybe I'm misunderstanding you here.

 

[mhaze]

But wait a minute... where do you see the illegal activity?

All investing is betting on the future.

For a fiduciary to "bet on the future" with the added guarantee of "insurance against future losses"... how can that possibly be a breach of fiduciary responsibility?

Maybe I'm misunderstanding you here.

Then wouldn't any IPO investment + "insurance" be "safe and secure?"

But they are not, and they are expected honestly to yield NO dividend or other income stream with few exceptions based on the nature of the business. You are trying to claim that "insurance" yields "safe and sound" with respect to income stream, where there is no underlying asset.

If I understand correctly.

By the way googling Deriv + lawsuits showed essentially a target rich environment.

 

[Puppycow]

Fed Creates Another $600 Billion 'Out of Thin Air'

Here we go again:

What the Fed did and why: supporting the recovery and sustaining price stability By Ben S. Bernanke

 

[Puppycow]

Will a paltry $600 billion be enough though?

Fed’s More Aggressive Move May Not Go Far Enough

 

[soylent]

You're presuming that there was a scam. I don't think there was, at least not at the core of the meltdown.

Fraud was at the core of the financial crisis. William K. Black's presents this better than I ever could. He was a senior regulator who helped clean up the S&Ls and shut the frauds down while they were still reporting fraudulent record profits.

He presented his case in brief at the financial crisis inquiry commission:
http://www.fcic.gov/hearings/pdfs/2010-0921-William-Black.pdf

 

[Piggy]

Fraud was at the core of the financial crisis.

It will certainly make an interesting case.

 

[daenku32]

Krugman says it's not going to do much, so there. My hive mind is made.

 

[oddball]

It's too much debt that is the problem right now.

Several cable networks have refused to air the following ad, from Citizens Against Government Waste:

http://www.youtube.com/watch?v=OTSQozWP-rM

 

[Piggy]

Several cable networks have refused to air the following ad, from Citizens Against Government Waste

I'm not surprised. All it does is to take an argument against US gov't policies and put it in the mouth of someone we're supposed to fear. Bad form.

 

[Piggy]

You are trying to claim that "insurance" yields "safe and sound" with respect to income stream, where there is no underlying asset.

No, not at all. Balancing the bet on the future isn't problematic in itself, that's all. But betting on anything you know to be worthless, with someone else's money who you're legally required to be safeguarding, certainly is problematic.

It's not the hedge that matters, it's the understanding of the underlying risk, and the representation you've made of that risk.