Friday, October 10, 2008

Toxic Assets: Buy? Bah!

So the markets are crashing.

Maybe tomorrow they will bounce back, the intravenous infusion of taxpayers money (or should that be smelling salts?) will revive market sentiment and action at global level by the G7 will do the business. The markets will revive and we will get away with a couple of years recession, and then – back to BUA (business as usual), with banksters and politicians building nuclear power stations, burning oil, blathering about doing something about global warming sometime fairly soon in the not too distant future, and fighting illegal wars.

Or not. As the case may be.

If the markets are to be saved from galloping en masse, grunting and snorting, over the cliff, something will have to happen about the Toxic Assets (TA) problem.

I spent a couple of hours today checking out the source of the $1.14 quadrillion figure for the TAs that I gave in the blog below. It was quoted as from the Bank of International Settlements. I went there and found December 2007: $57 trillion, and May 24 2008: $596 trillion, but no quadrillions of any kind.

Maybe $1.14 quadrillion is a bit of internet bla-bla, and the TAs are only $596 trillion. Though they could easily have doubled since May. Anyway, half a quadrillion is still a lot of money in USD. Though not as much as it once was.

Paulson is actually trying to BUY some of these things. Does he reckon he can spend a quadrillion? That is a thousand times the amount he has spent so far.

The fact that we are bandying these numbers around is a symptom of notional hyperinflation. Real hyperinflation cannot be far behind.

All this weirdness is the result of inside out, back to front thinking that lies at the heart of the debt-money system. “Toxic Asset” is an oxymoron. How can an asset be toxic? Surely if it is toxic, it is a liability, not an asset?

Not in DebtMoneyLand language. If you take a loan from the banking system, your debt is entered twice, once as an asset, and once as a liability. Your debt is an asset to the bank because you pay interest on it, which is how they make money. Only if you stop paying, the asset account turns into a debt. This is the risk the bank lender makes.

Managerialists (new word, meaning someone who has had his or her brain stuffed with MBA information to the exclusion of all else) hate risk, but love risk management. The clever instruments offered by the derivatives seemed to be a sophisticated way of managing risk. Managerialists bought into them. But in order to function, the derivatives multiplied the amount of debt, and it now stands at this very large figure of between half and one quadrillion.

In the words of my old surgical registrar, these derivatives are a heap of dingoes’ kidneys. They are not assets, they are a fantasy number: they are like free market equivalent of the square root of minus one. They should not have come into existence, and only did happen because the financial regulators had their brains on standby mode.

We do not mind the market in derivatives hoovering itself up into nothingness; we do not feel sorry for the marketeers and banksters as they watch their graphs going southwards; but we do care about the pension funds, and the effects of recession on real people.

So we should make a special Toxic Asset Dump (TAD). I am pleased to find that Willem Buiter, a respected professor of economics at the LSE
is of the same opinion. The difference is that he thinks we should BUY the damn things. This is repugnant. The people are doing the banking system enough of a favour by providing a service where the poison can be taken out of the banking system, so that the banks, sadder and wiser, can get back to their core business of acting as intermediaries for the real ecological economy that is going to need all the financial help it can get over the next few years.

Still, he is the professor, so I will look out for the case for purchase to me made. So far, he has a problem in finding out what the market value of the "assets" might be. To my simple thinking, if they are toxic, they have a negative value, so the banksters should be grateful that we do not ask them to pay us for taking them off their hands.

Buy? Bah!

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