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Post 0

Tuesday, February 21, 2012 - 12:52pmSanction this postReply
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(Edited by Sam Erica on 2/21, 12:54pm)


Post 1

Wednesday, February 22, 2012 - 6:44amSanction this postReply
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merjet wrote:I still thought the book covered the territory it did pretty well. The authors say the primary cause of the financial crisis -- reduced lending by commercial banks to non-financial companies that are part of the "real economy" -- was Basel I and the Recourse Rule (an adoption in the U.S. of part of what later became Basel II), which specify capital requirements for commercial banks. These set low capital requirements for mortgage-backed securities compared to much higher capital requirements for loans to non-financial companies. A secondary cause is mark-to-market accounting, which affected capital adequacy.

A major thesis of the book is ignorance--of both regulators and bankers. Regulators acted lacking understanding of the full range of regulations that apply to the regulated and unintended consequences. It appeals to the difference between "uncertainty" and "risk" ala Frank Knight and Keynes.
I went to Wikipedia to read about "mark to market" accounting.   It is easy to understand, but still argot for the subject matter experts.  Not a big deal.  One minor point from my experience is that this is how government accounting is done.  When you buy a razor for a $1 and sell it later for $2, you made a $1 profit.  You pay tax on that.  But the government only needs to know how much it will cost to replace the razor (it does not sell them), so its assets are constantly re-evaluated at market price.


Post 2

Wednesday, February 22, 2012 - 8:06amSanction this postReply
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Reply to post 1:

Mark-to-market accounting was a "big deal" to some people during the financial crisis per both Wikipedia and the book. It required banks to reduce the stated value of their assets and their capital following a questionable valuation method. More specifically, they were required to mark-to-market mortgage-backed securities (MBS) using the ABX indices (you can find that term in the book using the "Look Inside" feature), which were crude and gave "fire sale" prices. The Wikipedia article has a few references to articles that were critical of using mark-to-market for MBS at the time.

A different valuation method would be to project an asset's cash flow and calculate the present value of that. With insufficient knowledge about the particular mortgage-backed securities and the ABX indexes, I can't say if that would have been a much better method or not. Also, this method can be a very complex task for a tranche of a pool of mortgages and/or mortgages plus other things (corporate bonds, credit card receivables, etc.)

I had to use a dictionary for "argot." I would have used "jargon."

I don't grasp your point about mark-to-market and government accounting.
(Edited by Merlin Jetton on 2/22, 12:03pm)


Post 3

Wednesday, February 22, 2012 - 10:34pmSanction this postReply
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Merlin, you can have any accounting methods you need and there is nothing wrong with two sets of books. Market value is an important consideration. However, as you (and Friedman) pointed out, it created an unpredictable roller coaster of valuations. Coupled with reserve requirements, the loss of market value caused a liquidity crisis.

My other point was that being familiar with "mark to market" for their own accounting, governments found it easy to force that on banking.

I suspect, also, though, that this was not "forced" on all banks, but that some wanted it, as, indeed, with rising market values of assets, lending could expand.

Laws distort accounting. As I pointed out, the primary consideration is that when you buy something for a dollar today and sell it for two tomorrow, you pay tax on the profits. That the dollar is smaller or that the sale price is below replacement cost are not factors... usually...

I do not know enough (or much, really) about accounting. As a technical writer, I took some seminars for data processing because so much in computers is for finance. I have a simple rule: "Debit an asset to increase it." From that, I can derive the basics of T-accounts. Beyond that, I am ignorant.

That said, I know that you can take one-time charge-offs and write-downs. But they are one time... So, how you would deal with changing market values without actually dealing with changing market values is beyond my ken.

(Ken... like argot... Why I am a writer, and not a mathematician.)


Post 4

Thursday, February 23, 2012 - 5:10amSanction this postReply
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My other point was that being familiar with "mark to market" for their own accounting, governments found it easy to force that on banking.
I'm still lost. As far as I know, governments in the U.S. do income statements on a cash basis and that's all, and none even do a balance sheet. Marking-to-market primarily concerns a balance sheet -- the assets and capital. It affects the income statement some times.

Post 5

Thursday, February 23, 2012 - 11:58amSanction this postReply
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Apparently, we need to agree on a definition of "government." Way back when I did a year documenting software for the DoD, I completed a certification in "Principles of Military Accounting."

The audit project I was on was called "Operation Mongoose."
I googled these:
http://www.dod.mil/execsec/adr98/chap17.html
http://comptroller.defense.gov/cfs/fy1998/40_dfas-wcf-98.pdf
http://www.dtic.mil/cgi-bin/GetTRDoc?AD=ADA427220

A ship is a business and is treated as such, but they do not sell what they deliver.



Post 6

Thursday, February 23, 2012 - 12:35pmSanction this postReply
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Apparently, we need to agree on a definition of "government."
I think our difference is not about a definition, but what we are using as instances.

I looked at your links. One showed a balance sheet -- for a tiny part of the Department of Defense and the year 1998. When I said governments don't do balance sheets, I meant the federal government (as a whole or even big parts of it) and state governments. I don't know about all the cities and counties, but I have never seen a balance sheet for one and suspect few or none of them do a balance sheet.

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Post 7

Saturday, April 21, 2012 - 6:28amSanction this postReply
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Here is an excellent article about the banking crisis of 2008.

Post 8

Saturday, April 21, 2012 - 11:52amSanction this postReply
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Merlin: "excellent article" that's funny.

The article claims that the cause was the "haircuts" where banks began paying 20% less than they had before for "subprime" (defaulting) mortgage securities. That it was not directly caused by the drop in housing prices. But clearly the drop in housing prices caused the defaults, which caused the drop in subprime mortgage security value.

The article falsely claimed that DFIC depository insurance was a fluke. No, it was part of the plan of the big irresponsible bank cartel in creating the Fed so that they could get bailed out at the expense of the little responsible banks (who were forced to pay the insurance), the taxpayer (who congress used their tax money to bail out when the Fed insurance bank was emptied) and the saver (when the Fed printed new money to bail out).

It does not mention the reason why the housing prices increased to bubble (Fed reduced interest rates at discount window so that Federal government could spend more money and friends could make more money on selling loans). It does not mention the reason why the housing prices did not continue to rise (the discount window rate hit 0 and you can't make it go any lower than that). With the housing prices plateauing, loans which were known to only be solvent if housing prices were going to continue to rise (such as ones made with no money down, or where the borrower did not have the income to pay it) dropped in value.  Such loans were no longer possible, reducing demand for houses.  This dropped the prices of homes.

The article claimed that people such as politicians and economic professors were not aware of this going on... and hence they could not create regulations to prevent its occurrence.  That is complete bullshit...  because this is the true purpose of the Federal Reserve: to create bubbles where its friends can loan money, make money with the interest, and then bail them out when the bubble collapses.  The regulators assist the bubble creation, such as by requiring banks to make loans out to minorities that have no income.

Our enslavement by the elite politicians and bankers... who divvy out welfare to gain popular support, who publically support keynesian economics (which they know is bullshit) and publically laughingly discredit austrian economics (which they know is true) ... continues.

(Edited by Dean Michael Gores on 4/21, 12:11pm)


Post 9

Saturday, April 21, 2012 - 1:38pmSanction this postReply
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Bleh, more points:

"Deposit insurance was not proposed by President Roosevelt; in fact, he opposed it. Bankers opposed it. Economists decried the “moral hazards” that would result from such a policy. Deposit insurance was a populist demand. People wanted the dominant medium of exchange protected. It is not an exaggeration to say that the quiet period in banking from 1934 to 2007, due to deposit insurance, was basically an accident of history."

Thats complete bullshit.  1. Insurance was part of the Federal Reserve plan.  2. The banking period from 1934 to 2007 was not quiet.  3. There is an implication here that FDIC is considered good by everyone.  Productive people and honest bankers do not like being forced to use FDIC.

"There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking."

This seems to imply that the private bank system is similar to the federal reserve system in respect to there being banking panics.  But of course the difference between private competing bank currencies and a single bank currency enforced by the federal government is that...

Private banks:
- There is competition that limits reserve ratios, and losses are limited to whoever chooses to deposit into corrupt banks.  "Don't put all of your eggs in one basket" protects the middle and upper class.
- A simple kind of bank deposit contract that requires 100% gold backing of checks/reciepts and frequent audits can be created to protect the lower class.
- The federal government does not have unlimited access to funds printed by the Fed (inflation tax on anyone that has property).
- Corrupt bankers do not get bailed out, they lose their shirts.
- Cautious bankers do not have to pay the FDIC tax to currupt bankers
- There is no ability for close friends of the private banks to get access to a "discount window" to enable them to loan to the public at a higher interest rate


Post 10

Sunday, April 22, 2012 - 5:06amSanction this postReply
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Dean,

I didn't mean to say it was excellent in every way, but for what it said about the banking crisis of 2008.

I don't believe he was denying that falling house prices were causal in the financial crisis.

He said bankers opposed the FDIC. That was probably true for some, maybe a majority. Surely some supported it as you say. Anyway, creation of the Federal Reserve in 1913 and the FDIC in 1933 were separate events.



Post 11

Sunday, April 22, 2012 - 12:41pmSanction this postReply
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Merlin, OK, thanks for keeping me honest on these matters.

Post 12

Wednesday, April 25, 2012 - 9:58amSanction this postReply
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Merlin:

Gary Norton's arguments, in total, reading some of his other papers, seem to be a passioned argument to ultimately socialize the risk of that 'shadow banking system', in order to avoid future panics.

His implicit argument, to me, seems to go like this: we've reduced/eliminated panics in the 'normal banking' demand deposit world by way of FDIC insurance. The 'shadow banking' world (interbank transactions with large investers seeking totally risk free 'demand deposits' on one side, and banks trying to convert their bundled debt instruments into usable cash on the other), his assertion is, is an absolutely necessary(probably so)element of modern banking. If that element is necessary, it is still subject to panics by the 'depositors' and so, the way to eliminate those panics is the same way we eliminated panics in the 'normal' banking world, via 'insurance.'


But what is insurance? It is an informed bet placed by an insurer over many bettors. He accepts the bets, and pays off when he loses. Doesn't he? Or, is it, he wins when he wins, and he doesn't lose when he loses?

FDIC is such an insurer. Bets are placed, but when there are losses, no matter what the fine print says, the losses beyond premiums paid by all banks in total are ultimately backed by others, taxpayers.

And, we have freshly come to learn, so is AIG such an insurer, too big to let fail. When they win, they win. WHen they lose, they shed the loss onto others. Sweet.

What does 'collateral' mean, if when stuff happens, the thing we are ultimately asked to believe is that we cannot let the ephemeral nature of 'collateral' be the insurances necessary? At one end is, massive investors seeking risk free deposit of their assets, and accepting/trusting collateral for their 'deposits.' The nature of that collateral is supposed to be an element of their confidence in the banking system. But into this value-proxy Disneyland stumbles all kind of players attempting to game the game for their own leg-up agenda(including, but not limited to, the government itself with its own constructivist agenda), and when word of that no longer acceptable level of filth permeates the 'shadow banking system', then suddenly, the required element of trust in all that purposely 'informationless' collateral is suspect, leading to panic, leading to a drop in bonds as collateral value, leading to massive losses and a collapse of the banking system. His 'E. Coli. argument is very good; it may be only a small bit of E. Coli in the entire system, but when you have no idea where it is, then during a panic it is just panic.

And, what Gorton is arguing for, at least implicitly, is an acceptance of, an institutionalization of this idea of 'risk free' transactions, where in the still going to happen crevices, the offering of crap for value will be backstopped and tolerated by the full faith and credit of using other peoples money and and future generations credit.

Because we need -- he claims repeatedly -- the 'shadow banking system' -- and banking in this nation cannot exist without it, effectively transforming the entire nation outside of all that financial engineering into unwilling premium payers to cover the shed risk shenanigans of others.

However, the tribal cancer running loose in our economies is exactly the idea of risk shed onto others. It doesn't help those who end up with the consequence of the now easily accepted willy nilly risk, and far more importantly, it doesn't tune up and discipline the benefactors of all that shed risk.

When those who -accept- the risk are not at loss of that acceptance, then where is the incentive for them to even give it a second disciplined thought?

This is a terrible model for managing unavoidable risk in the universe, a real recipe for ruin, a race to the bottom.

It will create local eddies of favor for some brief moment of time, but systemic ruin.

But it is not a shock at all to hear complex arguments for the socialization of tribal risk coming out of the inbred Ivy League...

Still, his description of the event is very valuable interesting. I just have trouble with his implied conclusion/solution, and find it 180 degrees off.

What made me a little suspicious, is when he started off in one of his papers explicitly complaining about the 'political' nature of most explanations of the event. That is a dead giveaway that a con men might well be in the room.

That was also the moment that my hand reached to make sure my wallet was still there.

Indeed, his description of the event was not overtly political. But IMO, his implied solution was.



regards,
Fred
(Edited by Fred Bartlett on 4/25, 9:59am)


Post 13

Thursday, April 26, 2012 - 5:45amSanction this postReply
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Fred,

I haven't read other works by Gorton, but thanks for reporting on your research.

As I replied to Dean, my purpose in posting the article on RoR was his narrative of the banking crisis.

As for backstopping future runs on banks not now FDIC-backed, if the government or the Fed takes action, it will likely be a half-baked effort. I know the premiums paid to the FDIC are higher for those banks that pose greater risks to the FDIC, but I believe they are based only on capital ratios and not asset-liability match or mismatch. In order to minimize bank runs, banks need to have time-dependent deposits like CDs and not treat them like demand deposits.

Post 14

Thursday, April 26, 2012 - 10:36amSanction this postReply
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Merlin:

His technical descriptions of the banking industry and what happened, I think, are some of the best and most complete I've read, and are very good reads.

I just don't agree with his implied solution.

regards,
Fred



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