Question: Is it fair to say Krugman believes mortgage securities have no value at all?

[uponit7771]

I'm having hard time understanding why Krugmans battle cry is for the nationalization of banks vs what has happened already which "looks" like partial nationalization of the banks but in the partial sense we don't run the banks and we're still making sure the bad assets are being sold off.

If the bad assets are mostly the mortgage securities and they are worth SOMETHING and someone will buy them then the tax payer doesn't have to buy them and Obama can go about doing something more worthwhile with tax payer money than propping bank assets that it'll have to sell.

I can see the argument for and against nationalization of the banks, Krugman is starting to sound like he's arguing between better and best.

Thx in advance for your input

[KittyWampus]

1. there are many layers to the onion which is mortgage securities and derivatives and hedge funds

and insurance surrounding this whole engineered fiasco.

And quite a few of those layers were just paper with nothing of value except pure speculation. And it seems that pure speculation is enough for these bigger players to be guaranteed 100% payment from the US Govt./taxpayers.

So my understanding is, there are some assets and paper that have worth and quite a bit that has none.

A huge part of the problem with Obama's economic team is they don't seem to be insisting that every bank and financial institution and insurance group open their books and submit to a full cavity search. And then allow the results to become public.

BTW, we are very far from being out of the woods. I recently learned from another DU'er that there's another whole class of mortgage crap destined to crash in the near future and the amounts of money involved dwarf what has already transpired. Alt-A Mortgages.

[uponit7771]

4. Alt-A mortgages, like sub prime mortgages, are being paid at a 70% + rate (link) so I don't

...understand them being valuated at 0 or even 20% either.

http://www.nytimes.com/2008/02/12/business/12credit.html

Looking at the facts if I had 10k to go into buying some of these subprimes at a reduced rate I'd do it...

There's some good money to be made

[TayTay]

9. Does that money including paying back the taxpayers at 100% of investment?

I think that is a part of the argument here. The taxpayers are putting up 97% of the money, and insuring the risks. Is that the right way to go?

[uponit7771]

12. We'd be in at 100% of these MBS's if we nationalized them and then it'd be on our shoulders still...

...I'm not sayin Obama\Giethner right is the best way to go but it looks like we're talking about good vs great and so is Krugman.

[TayTay]

19. I think we are still at the "which is better" stage.

There is still a great deal of discussion in Congress and the media about taking the nationalization path because it will get all the suffering out at once. I have heard from a lot of other economists who say that the Geithner plan is just not bold enough to really deal with the problem. It will simply draw out the inevitable over a longer and more painful period.

Isn't that the crux of the argument?

[uponit7771]

21. IF you believe the MBS's aren't worth anything and the government hasn't take any steps...

...in getting the banks back to lending.

Those things can happen WITHOUT nationalization and putting the tax payer on the hook for corporate bonds owed by these firms once they've been broken up.

No lending and bad assets on balance sheets is what lead to "zombie" banks in Japan. No banks lending, no M2 into GDP = a flat or shrinking GDP which a government will usually have to make up via various "stimulus" plans which this country has PLENT

The Japanese weren't as much of a consumer based economy as we were are and their infrastructure wasn't in tatters either, hell....the Japanese were building airports in the middle of the ocean during the late 80's early 90's just to get some projects on the books.

I willin to give the Obama admin a shot on this one since they haven't ruled nationalization out

[high density]

33. Great points.

The whole "nationalize now" argument seems to assume the cost of that plan is zero dollars, while the toxic asset plan is $1 trillion. Nationalization just hides the toxic assets under another layer that still has to be dealt with.

[Eric J in MN]

2. If people were buying the mortage-related securities at a high price,

...then there would probably be no government involvement. They aren't.

Tim Geithner wants to give hedge funds "no recourse loans" to buy the securities.

[uponit7771]

5. They don't have to be valuated at a high price...just better than 0 or 20% and if the hedge funds...

...buy them then that keeps the US tax payers from having to own them, their liabilities and selling them.

Again, I don't see a ton of difference between what Obama is doing right now and nationalization of the banks outside of direct ownership and running of the banks and owning the troubled assets outright.

Thx

[Eric J in MN]

31. The hedge funds may not repay the $1 trillion in loans they will get,

...which would hurt the taxpayers.

[Cleita]

3. I would go further and nationalize all the extraction industries, like oil,

mining, lumber and our food production. The natural assets of our land belong to the people and the proceeds should be used for the benefit of the people for health care, education of the children and our basic security, but then I'm a dirty, pinko commie. If there must be a Wall Street, I think the name should be changed to Casino Street with a warning, "invest at your own risk".

[uponit7771]

6. I agree with you to some extent but instead of nationalizing those assets regulate the dog snot out

...of them to the point of guaranteeing a return but preventing private from gambling with them and taking down the whole country like AIG has done.

[Cleita]

7. Regulation is better done on private sector businesses like manufacturing,

which we don't have anymore because of deregulation, but if we increased tariffs on imports we could get our manufacturing base back. This is the sector that should be so-called free market, but our natural assets in which we extract products from mother earth should belong to the commons. I come from a mining background so I know how destructive private companies are in mining our natural resources even on federal and state land and they take all the profit giving very little back to the communities that they pollute in. Poor agricultural practices cause erosion, salting and pollution of streams and air. Nationalizing them should insure environmental and safety practices and the profits should be used for the betterment of the citizens of this country. If we had the money that is made in oil, lumbering, and mining in this country we probably would never have to pay taxes again to support our government structures. We own these natural assets and they should be there for us the people.

[AngryAmish]

8. Anything's value is the price you will pay for it

If there is no market for a security then it is worthless. There is cash flow you say? But there are externalities which make them worthless.

[uponit7771]

10. The securities were initually valuated on whether or not they're going to be paid and that gut check

...number isn't even close to the 50% the great depression brought the mortgage industry.

The "market" isn't insane all the time on everything, they see the can buy something 50 cents on the dollar and make another 20 risk free......shit.....I want into this

[depakid]

15. I think you're confusing illiquidity with worthlessness

That few are presently willing to purchase something (at least for what the sellers are willing to accept) doesn't mean the asset has no value.

[AngryAmish]

23. No I am not

Unless you have a buyer then the asset is worthless. That is the point. You may think your child's scribblings have a value on par with a Picasso but since no one is willing to buy at higher than scribblings value then the asset you refuse to sell is worthless.

You may say to a bank that you have an asset worth millions but if you tried to borrow against it you would find how much the scribbling is worth.

This is the point of the zombie banks. They say these mortgage-based securities have a value yet they can't prove that, thus they have no assets. Mark-to-market prevents this sort of nonsense.

[uponit7771]

24. I don't see that it's fair to call the assets worthless yet, we'll see. Default rate on MBS's

...are around 24% for sub primes...these things aren't worthless IMHO

[AngryAmish]

28. There is only one real price and that is the market price

Everything else is dreams.

There is a cash flow from these securities but who knows what else comes with buying these securities. Government scruitiny for beginners. What is you are a vulture fund and buy these things up at 20% of face value. And you then make a gigantic fortune when the economy stabilizes. You took a risk (perhaps even backed up by government loan guarantees). Word gets around that you made hundreds of millions or billions. Do you want to be subpoenaed and have Barney Frank screaming at you or have your income taxed at 90%? This is exactly what Treasury is proposing - and what Congress is proposing.

[digidigido]

30. Ahhh a free market troll. The problem with your point is that the value of things changes

on a day to day basis. To use the what is it worth today argument as the entire weight of value ignores the
changes in value. When Gold was 240 an oz, and at a 40 year low, it was easy to see that it was undervalued
for THE LONG TERM even though that was what the market said it was valued at.
The same is true of the securities that were talking about, there's todays value, which anyone with a brain
knows is a fire sale price, or there's the long term value of it. The problem with the markets, and what has
gotten us to this place, has been the obsessive short sighted focus on short term profits.

[depakid]

29. Apparently you are

If you don't have a buyer today- or in several weeks or months- the asset is illiquid. The fact that you want more than others are willing to pay simply means that value can't be agreed upon. One party isn't willing to take a hit- the other isn't willing to pony up vis a vis the risk.

Hence, it won't be sold until there's some movement toward equilibrium in terms of price. That's a completely different deal that worthless paper, e.g., Confederate notes after the Civil War.

[JFKfanforever]

32. Many of the CDS swaps outstanding will indeed be worthless!

Here is one analyst's solution to this incredible problem:

http://www.opednews.com/articles/CREDIT-DEFAULT-SWAPS--THE-by-Chuck-Simpson-080924-49.html

[Zynx]

26. It depends on what method of valuation you use.

You can use a discounted cash flow method or just a raw market value method.

[BlooInBloo]

11. At least not enough to make investing in them worthwhile.

[uponit7771]

13. Unnn, the MBS's were originally valuated by whether or not the mortgages would get paid and that's..

...still 70% + true for sub primes and even more for alt-a loans.

The default rate on those loans aren't 100% which would mean the MBS's aren't worth a damn cause you'd never see any dough but it's fair to buy them at 50% and be able to sell them for higher after people see the default rate go down.

The US tax payers are some of the most stable home owners on the planet

[BlooInBloo]

16. Don't argue with me, argue with Krugman.

[uponit7771]

18. True, it seems like it's such a simple question to ask but he's not addressed it in all I've scanned

...\read of his articles.

[FrenchieCat]

14. It isn't so simple.....that's for sure, but selecting which process to use

ultimately is a smaller part of what will be required than we realize!

The banking crisis as a foreign policy issue

If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.

No one wants to say it, but essentially the Fed has been bailing out European banks.

The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars. If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan? (I do not, by the way, think that central banks ought to treat foreign creditors differently.)

One attempt to formulate a bailout plan for eastern Europe just failed. This is round one in a series of longer negotiations. As the European financial crisis worsens, and Germany asks itself whether it will bail out Ireland and Hungary and maybe others, it will become increasingly clear that major foreign policy crises are afoot.

The best actual marker of the progress of the financial crisis is not stock or real estate prices, but rather how well international cooperation holds up.
http://www.marginalrevolution.com/marginalrevolution/2009/03/the-banking-crisis-as-a-foreign-policy-issue.html

The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization — none are satisfactory.

A bailout means that the government makes good on the value of the securities, including the derivatives which are tied to the collapse of the U.S. economy. That means the worse things get, the more money flows out of the country. Not politically acceptable.

Letting insolvent banks go bankrupt is the option being pushed by some politicians, including John McCain. In some ways it would be the cleanest solution, allowing the bankruptcy courts and the FDIC to do the tough job of allocating the losses from the toxic securities.

The problem, though, is that they tried the bankruptcy option with Lehman, and they nearly broke the global financial system in the process. The Lehman bankruptcy backfired, creating new panic around the world. This reflects how much money many foreign investors had put into the U.S., and how many worried about losing it when Lehman went under.

Nationalization creates a political problem. Once the government buys a company, it is financially and morally resonsible for its debts. It puts the U.S. government in the position of either using taxpayer money to bailout foreign investors, or telling foreign investors, no, the richest country in the world is not going to pay its debts.

What’s the solution?
Conclusion: Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html?chan=top+news_top+news+index+-+temp_news+++analysis

more on this here: http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=8281017&mesg_id=8281017

[uponit7771]

17. Bush admin truly screwed us on many fronts, everytime I think about how long their bad policies

...will last it pisses me off.

Krugmans argument of "zombie" banks is becoming defunct though mainly because the Obama admin is doing something different than nationalization but the outcome will most likely be the same.

- Get rid of toxic assets so the banks can be valuated better
- Get the banks lending to consumers again
- Get the banks profitable so their share holders don't dump them and take global firms faster than the government wants them taken down.

Nationalization would do the same thing but with the risk of the tax payer having to valuate and off load the bad assets verses letting private partners do it.

[FrenchieCat]

20. You've got it.

Bottomline is nationalization poses the problem everything that whatever happens within any of these nationalized institutions becomes a story for the media to blame on Government.

That's the part that the Government is attempting to stay away from....cause that is the part that could bring any government down; to be held accountable for everything that goes on in a giant international company. the first difficulty that I can see would be the attempt at staffing the management level of nationalized companies. Who do you recruit to come in and take over, when most who have experience in what needs to be done are tainted by simply having worked in the financial market industry. All it would take is one bad choice, and the media would be all over this administration. It would be like 500 times more difficult than having cabinet members confirmed.

It would drain all of the government's time, and quickly lead into a spiral where those who caused the entire mess to begin with take back the helm.

That's why critics are great as long as the are in full knowledge of the circumstances.

As an accountant, I issue Financials that bear this sentence at the end of our disclaimer letter to anyone reading what we have compiled....that after all is said and done.....

"Accordingly, this financial information is not designed for those who are not informed about such matters."


Unintended Consequenses is what I'm talking about. Nationalization if it leads to scandal has the potential to bring this administration down and return this country to a governmental hands-off approach for years to come. We would essentially be walking ourselves back to the very same Bubble Economic system that we have just experienced.

[uponit7771]

22. America spend 40 trillion a decade on health care, You've prolly though about this too;....

...but maybe the Bush admin did this all on purpose to stop what ......they knew was coming with the Obama admin knowing McKKKlan didn't have a chance in winning after Palins Couric interviews.

Paulson HAD to know that letting one of the oldest trading firms on Earth today fail would trigger a run on money market accounts that wasn't FDIC insured (no one was worried about the < 100k accounts that were FDIC insured) in fear the US government would let the rest of em fail.

I wouldn't be shocked nor surprised if this was all set up to stop the Obama admin from lowering the cost of health care and energy and then picking up the GDP a tick or two for a generation since we wouldn't be giving a good portion of our money to health insurers and greedy care organizations.

[FrenchieCat]

25. Yep....there certainly could be a lot of pieces that we programmed in advance.

it is deep shit that we are in.

I've flushed out my thoughts on nationalization, or better yet against it here - http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x8282342

[joeybee12]

27. No, what he's saying is that taxpayers should give banks 97% of what they

need to buy them...it's a win-win situation for banks, while the rest of us are struggling.