Monday, December 12, 2011
Non Sports: The Dreams In The Witch House Edition
Saw an interesting column by Hernando De Soto today, which exposes the fact that we have not been keeping up with Gray Lady like we should be, but alas, what can one do?
De Soto makes the point that the problem with the financial sector, and by extension the economy as a whole, is that we cannot trust the balance sheets of business, (and we will add here, specifically of the banks) and because of that, we cannot go ahead and make rational business decisions. It makes sense. If you cannot trust the price signals of whole classes of assets, how can one make a decision about, for example, whether an asset has fallen in value to a sufficient degree where one can buy it up, get rid of the deficiencies dragging its price down, and then sell the excess value created for profit?
In De Soto's words:
"How can anyone be comfortable extending loans if balance sheets don’t signal all the facts? If those who hold the assets and the risks cannot be easily located? How do you know which banks and countries are solvent, if you cannot determine how many toxic assets they hold; if the legal owners of mortgages can’t be found; if banks can’t clear their books because courts continue to stop foreclosures because titling is unclear; if there is little information on whether those who claim they can cover risk defaults have the assets to do so?
This, then, is not your usual financial crisis. The plummeting economy is the symptom. Diminishing knowledge is the disease. Without property and transaction records that allow us to infer potential benefits and losses, markets can’t work."
Right. Exactly. We still don't know what the toxic assets the government took of the banks balance sheets are worth. We still don't know how the derivatives left on the banks balance sheets are even valued. The big secret of the world economic system is that it is the ultimate 'Faith Based' system. And currently, the 'faith' has been broken, because, to regurgitate Soto, the balance sheets cannot be trusted.
But here is the thing: Do you have the stomach to pull back the curtain on the void? To step into the swirling chaos? To walk through the unlighted chambers of maddening infinity?
The balance sheets are cooked because no one dares allow the name 'Azathoth' leave their lips. Essentially, these are the companies that took TARP, or Son Of TARP, or some such bailout. All these companies now have suspect balance sheets. In fact, all of these companies could very well be bankrupt. Our favourite example to use is Bank Of America. Bank Of America should be dead; it has no money, it went bankrupt. But there it is, undead, and living on taxpayer funded morphine.
Not really a point to all this. The world will continue to muddle through until some adults who aren't afraid of nightmare come onto the scene. But the world seems to be run by pretenders.
Furthermore, I think Hank Paulson should be arrested.