Troubled assets explained
January 31, 2009 – 3:18 pm by JohnUncharacteristically, I already understood this banking and finance term on my own through reading and hearing about them, but John Carney gives a good explanation of what “troubled asset” means. More important is why it is a terrible idea for the government to buy them or guarantee them; far from saving any industry or helping any part of the economy, it can only impoverish people more and prevent the banking/finance industry from fixing itself. Yet another example of how government interventions to correct the market or regulate the economy into prosperity do exactly the opposite.
Troubled assets are just stuff that banks paid too much for. Mostly, that stuff is loans made to people who cannot afford to pay them off, secured by collateral that is worth less than the loan value. Those loans were made so people could buy everything from homes and cars to shopping malls and construction companies.
The reason they are financially crippling is that banks don’t want to admit how badly they overpaid, so they keep carrying worthless junk at inflated values on their balance sheets. The “systemic” problems arise because everyone knows the banks are holding junk that they are pretending are jewels. Investors and lenders don’t believe the assets are worth what the banks say they are, so they won’t lend or invest against the phoney valuations.
Let’s make this even more concrete. Imagine you bought a Batman comic book from the 1950s at the height of the comic book craze. Back in the 1980s and 1990s, a lot of people believed they could get rich buying and selling comic books from their grandparents’ attics. So maybe you would have believed that the May 1952 issue of Detective Comics, the one where Batman and Robin fight a “phantom menance” who perpetrates “famous crimes,” would be worth thousands of dollars. If you bought it for $2000 bucks, you might even have believed you were getting a great deal.
But now that the comic book bubble has burst, that comic will only fetch $200. You can gnash your teeth, complain that the storyline is really interesting, that the comic isn’t actually falling apart and should be worth much more. You might even think that one day people will be willing to pay thousands of dollars for comic books again. But if you were to try to borrow a couple of thousand dollars using the comic book as collateral, the lender would laugh at you. Your comic, you see, is a troubled asset.
When the government guarantees the value of a troubled asset, what it is really doing is promising to pay anyone who ends up owning it the difference between the phony, inflated value and the actual value it fetches on the market. Buying troubled assets, if that actually ever happens, works pretty much the same way: the government pays more than the asset is worth, exchanging something really valuable—dollars—for something that has a lot of, well, sentimental value for the bank.
There’s a joke about “famous crimes” here somewhere.
The Obama regime’s financial-rescue programs will not help very many people outside of the banking industry, and they will only do this in the short term. Things like this are what impoverish nations and cripple economies! Despite what Obama himself wants and despite official statements rejecting the idea of setting up a national “bad bank” or “aggregator bank” to overpay banks for troubled assets so that they can stay in business and keep credit flowing, the financial industry lobby and Goldman-Sachser Timothy Geithner will make sure that billions of dollars are taken from taxpayers (or printed, which amounts to exactly the same thing) and given to banks to save them from losing money on their toxic assets. Maybe not every bit of them, but a lot of them.
We are told, “Aides would not rule out the possibility of the administration’s asking for more than the $350 billion already allocated.” Most libertarians, myself included, predicted that the $700 billion allocated for the bailout of the banking industry would not nearly satiate them and suggested that a trillion or more dollars was a more accurate estimate. I expect to be proved correct.
We are also told, by our Savior Himself,
While I’m committed to doing what it takes to maintain the flow of credit, the American people will not excuse or tolerate such arrogance and greed [among corporate executives].
Obviously they will not only excuse and tolerate, but also laud and encourage, arrogance and greed on the Obama regime’s part, for its dirigiste management of the economy, its insatiable demand for more tax revenue and inflation, and the favors it is in the process of giving out to investment banks.
The president said he would insist on “unprecedented transparency, rigorous oversight, and clear accountability” for funds that went toward stabilizing the financial system.
Increasing the transparency of the operations of the Imperial Federal Government would be swell, and I’ve heard this administration is making efforts to do so. I doubt the extent to which this will be accomplished, but even if it is great, it won’t be enough to prevent crimes and corruption that no administration can avoid. Obviously there is no oversight, rigorous or otherwise, of the State and never will be, so to spout palliatives about oversight of semi-private corporations is very hypocritical. Additionally, the type of regulation and oversight that Obama refers to is the same type of criminal activity that gave us the business-crippling Sarbanes–Oxley law, encouraged corproate executives to take their millions in bonuses in the form of company stock options instead of “outrageous” salaries, encouraged mortgage lenders (and Fannie Mae and Freddie Mac) to take on unwise mortgages, uncovered the Bernie Madoff scandal before it bankrupted millions of people (oh, what, that didn’t happen?), exposed Social Security for the fraudulent, bankrupt scam that it is (not that, either?), and, indeed, resulted in the very creation of the Federal Reserve. As for Obama’s promise of “clear accountability,” how exactly does overpaying by billions of dollars for troubled assets amount to holding anyone accountable for their mistakes? This will not help taxpayers or the economy, but will punish them for political and corporate mistakes and hinder our ability to improve our lot on our own.
It is the thousands upon thousands of mistakes and interventions like TARP that have put our economy where it is today, and, indeed, where it has been before and where it will be again. Bailing out failed businesses. Manipulating interest rates to help people do things and buy things that wouldn’t otherwise happen in a free economy. Skewing the perceived time-preferences in the credit market so that malinvestments keep adding up. Inflating the money supply so that the purchasing power of the dollar erodes over time. Redistributing dollars to make work for people in the short run but destroy wealth in the long run. Increasing the regulatory burden on businesses, which increases the barriers to entry that face potential new firms. Shifting the oversight and judgment of companies from the market to the State. Creating and enforcing geographical monopolies (utility companies). Allowing the State to actually hold stake in some companies (banks and automotive companies…it will probably happen). Holding the taxpayers accountable for the mistakes of banks, real estate developers, automotive companies, and many other businesses. Privatized profits, socialized losses. This is Corporate-State Socialism, and it is what is killing our economy.
I know that the economy would suffer even more if every investment bank just went out of business. But, first of all, their losing money on their toxic assets will not make that happen. Second, intervention after intervention after intervention will not solve the larger problem, which is too much State perturbation of market forces along with too little free-market “regulation” of the financial industry. Companies need to suffer for their bad decisions, new companies need to arise to take some of their market share, the Federal Reserve needs to stop manipulating interest rates and buying Treasury bills (printing money), and the recession we are in needs to run its course so that bad investments can lose money and capital and labor can be redirected to endeavors with a higher probability of profit. Also, of supreme importance, Americans need to stop consuming so much (about 70% of the U.S.’s GDP is consumption), start saving more, and sell things to foreigners, not other Americans. That is about the extent of the knowledge I have on what should be done; what is at hand, though, is Keynesian pump-priming, inflation, and income redistribution, and these need to be thoroughly thrashed and discredited, which is much more obvious and straightforward than prescribing solutions for an entire world economy.