Thursday, July 31, 2008

[Nuff Said] It's just unprecedented

5 comments:

Anonymous said...

Let me make sure I'm reading this right.
Red line is what banks/institutions have borrowed from the Fed, while green is the reserves of those institutions. Right?

Interesting that borrowing from the fed has not always upticked in a recession.

More interesting is the "unprecedented" part. It's almost like its meaningless. It appears like that much reserve doesn't even really exist in the system and instead all the accumulated reserves before 2007 were on paper only - they didn't really exist. Or, those reserves are only in subjective value things (stocks, mortgages, etc.) and when that subjective value goes to nothing, so does the institution reserve. Should the "value" of that paper go up, so do the reserves.

Am I reading this right?

JimDesu said...

Mostly, bear in mind these are net values. What's happening is that as more and more people unwind their positions in junk-mortgages that should never have been issued, a lot of level-3 (illiquid stuff that instead of being marked-to-market is on their books as mark-to-fantasy) instruments are getting valued at their current rates, not the rates the banks claim they'll be able to get for them someday. This skews their balance sheets way into the red, eliminating the cushion that they call "reserves".

Real reserves would be cash in separate, untouchable, accounts, but the Fed has played fast and loose with reserve requirements for so long that there's very little in the way of real cash sitting around. (And if you want a real fright, check out FDIC reserves versus liabilities.)

Anonymous said...

Your last statement IS what worries me since it appears that almost all money in the US is all of subjective value since it is backed up with subjective value things.

I'm not going to start on the whole gold standard thing, but really, what the hell exactly is our currency backed by? Goodwill?!?

So all of this is unprecedented, but why exactly and how exactly did all this occur? Either everyone at once said "Holy Crap! This stuff is worthless" or everyone suddenly realized that the whole thing is a game and they suddenly lost faith in the whole system. It's odd that over a huge history of the banking system that this sort of thing happens now. Why now and what is the cause which is leading to this symptom of unusual borrowing and worthless assets?

JimDesu said...

Um, greed, stupidity & corruption?

I'm not nearly enough of an expert to lay everything out, but I suspect the big thing has been regulatory regimes that allow institutions (like Enron, for example) to hide assets in off-balance-sheet items. The banks say that these assets are illiquid and that therefore their valuations are sufficiently subjective that their balance sheets shouldn't be punished for them, but to my mind that's an even greater reason to keep them on the balance sheet.

I mean, if your 401(k) were heavily invested in 6-penny nails, sure, there's value there, but just how liquid is that market and how much of your money will you be able to get out? If you're an owner of the company, you should have a right to know....

Anonymous said...

I concur.
On the additional regulations to show these bogus investments on the books and that greed, stupidity and corruption are the reason for this mess.

So to quote Bernard Black yelling out against those who suppressed him:
"Lies! Subterfuge! Shady Corruption!"

I'm really annoyed at the financial system. Who's ready to start over with the Barter System? :(

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