Hits: 2998

I was persuing my list of favorite blogs and came across this quote from Calculated Risk .

" And until market participants regain confidence in asset price, Feldstein argues Fed policy might be ineffective:

Monetary policy may simply lack traction in the current credit environment.
It is not clear what can bring back the confidence in asset prices that is needed for credit to flow again. Some analysts suggest that confidence would return if the financial institutions declare the true market value of their assets by restating balance sheets at the depressed prices at which they could be liquidated today. But this is not a practical solution, since many complex securities are no longer trading in the market. Forcing an actual sale of these securities at fire-sale prices in order to establish market values could also create unnecessary bankruptcies that would further impede credit flows.

Now, I must say I disagree with this. Many of the illiquid derivative assets that currently have no market will, in the future, be illiquid derivative assets that have no market. Delaying the marking to market merely delays the inevitable."As I have said earlier today, the majority of these "assets" were written during a the peak of one of the largest liquidity driven credit bubbles of our time, on the underlyings whose prices were peaking during the largest real asset and corporate expansion bubbles ever.

The bubbles have popped, and markets are reverting to mean. These assets and the derivatives written on top of them are not going to return anywhere near those levels for at least 7 to 12 years. Just think of the NASQAQ and the dot com bubble burst in 2000. It is now 2008 and have we fully returned. If you hold this bubble stuff, for all practical intents and purposes, you are effective underwater. If the leveraged amounts you are holding surpasses your equity by X%, you are insolvent and there is really no way around it. Liquidity cannot cure insolvency!


This goes for the management of the monolines who swear that market prices are not indicative of future losses. Whaaaaaat!!!!??? Someday, there will be some business students in an ivy league b-school class reviewing the monolines as a case study, saying "What the hell were they smoking?". This also goes for the big commercial banks like Citi who don't want to liquidate thier special purpose vehicles due to the mindset that the market is "mispricing" thier assets. The market is the price, silly. You are mispricing your assets. I can go on with the investment and mortgage banks, but I think you get the message. Once you buy, or create, something at the top of an asset cycle, the only direction to go is down. You can wait as long as you want, the top is the top and will be the top no matter how long you wait to sell unless you desire to wait till the top of the next asset cycle. Who knows how long that will be? I know it will probably be a long time for the real asset and credit markets, 'cause this asset cycle was a doozy.