How can something that has no value be an asset?

It isn’t hard to determine the value of these assets. It’s nearly impossible, however, to do so when you keep them bundled. Look specifically of subprime mortgage loans. The market disconnect which caused the problem was pooling. When the loans were originated, the originating lenders knew that they would not be holding the loan for long. When the individual loans were pooled for sale on the secondary market, they lost value as individual loans. They were sold on the premise that the individual loans were similar in risk and return. That was then, and remains now, a farce.

Some of the loans in the pool were perfectly fine. Others were nearly worthless. Bundled together, without an individual analysis, valuation is a crap shoot.

The loans could be valued now, the way they should have been evaluated when originated, through reasonable underwriting. But it has to be done on a loan-by-loan basis. I don’t see a short-cut.

Great link, Jason_Gordon! Well, great in learning how f’ed up mainstream econ has become. Check this out:

The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd.

Yep, according to super-cool econ prof. Greg Mankiw, if you don’t like the idea of negative interest rates, that’s like being against negative numbers altogether!

Hey Mankiw — how’d you like a negative salary this year? You wouldn’t be one of those crotchety anti-negative-number people, would you?

Since we are indeed a nation of mathematically incapable citizens, Geithner and cronies are throwing out impossible calculations at taxpayers. Just because they have strings of letters behinds their names, it mysteriously give them the license to b***shit the taxpayers. An asset MUST, I repeat MUST have value.

I worked for an attorney who was instrumental in the development of derivatives and credit default swaps. They were never meant to be traded to the public-at-large; they were instruments designed for institutional investors and “large net worth” investors to even out currency fluctuations in global transactions, particularly in commodities. They were derivatives OF the underlying transactions which, in many cases was a pack of 30 year mortgages. Derivatives have no value once separated from the underlying securities.

There is nothing magical about derivatives. They are merely private contracts between two parties, the contents of which were and should be unknown to anyone except the contracting parties. But traders, like sharks smelling blood, smelled a buck to be made and decided that they and the public at large should be trading them. Since derivatives are private contracts between private contracting agencies, Moody’s, Fitch’s and S&P could only guess at the value of the upper tranches of the transaction and rated them according to their guess. In addition, the derivative part got separated from it’s underlying asset, so essentially it has no value.

The banks should write the value of these “assets” to zero on their books. Since in many cases the derivative part of the asset has been split from the underlying securities, and, even if it hasn’t, its content is unknown, what has happened is akin to putting a foot-thick document into a shredder, in different directions twice, and then asking the Fed to put it back together again and assign it a value.

For Geitner to pretend that the Fed can actually put a value on these “assets” is simply preposterous. Or am I just calling the Emperor naked?

Negative interest? So the Fed is proposing becoming a taxpayer of sorts, and paying interest on it’s own loans? What kind of Idiots are these people? How long do they think they can do this without going bankrupt?

Welcome to the land of make-believe! La de da de da de do! Off to print some more o’de dough!
Woo-Hoo! Look Ma! No Hands!
(Crash!)

What are they smoking?

Please add this to my comment above. Let’s say the underlying value of the derivative is a 30-pack of 30 year conventional mortgages, each worth $100,000. Why mortgages? Because they’re a relatively boring, stable security in a normal market. When all is said and done, the complex formulae in the derivative part of the instrument amounts to 30% on a specified date. If you separate the derivative from the underlying security, it has no value: 30% of WHAT and WHEN? If I were Geitner, I wouldn’t want to tell the American public the bad news.

So I’m hearing all this new pub-talk coming from the king and court these days. Negative interest. Negative numbers. How about negative taxes?

I’d sure like it if the government gave me a share back every year of the debt it has racked up from me throughout my entire life.

Or maybe I’m the naivest person on the planet.

Good lord, make sure you read the negative interest rate article. Hopefully the student who came up with that scheme never makes it far in government.

“Unless, that is, we figure out a way to make holding money less attractive.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.”

So in summary, we are going to rob you – but at least you’ll be robbed at random.

I actually like whoever came up with legacy asset as a replacement for toxic asset. Not that legacy is a great replacement, but to identify something as a “toxic” asset suggests to many that the presence of that asset somehow destroys other assets. This is simply not the case. One cannot have a negative asset, one would call that a liability.

I view these legacy assets as collateralized accounts receivable. A bank or aggregator combined their accounts receivable and sold it as single asset to someone else. It seems to me that these Collateralized Debt Obligations (accounts receivable) would still exist even under a free banking system. What’s inherently flawed about them is that banks mark the CDO to the prevailing market price and used that as the reserve to loan out more money. But that’s more an issue of fractional reserve banking than collateralization.

Any thoughts?

Silas Barta is skeptical about Mankiw’s understannding of economics. Well, consider this from his Macroeconomics (2004, p226): ” The Federal Reserve was created in 1914 after a series of bank failures convinced Congress that the US needed a central bank…”
There is no mention of intertemporal capital structure, malinvestment from monetary, credit and interest rate counterfeiting or the Progressive politics that guided people to damn capitalism for interventionist destructiveness. One of his “principles” is that capitalism is good except when its not. Mankiw confuses arbitrary, statistical descriptions of a random flow of immediate events with a science of necessary causes, principles and system.

The first step in converting away from any dependence on anything is to simply start by using an alternative.

Tea bags and protests, letters and demonstrations are great, but they don’t really begin a change, they call for it. I have stopped thinking of my value, my time, my money, my things in terms of Dollars. I can’t measure properly with Dollars, so instead I compare my stuff to gold, and then convert to spot price $/ozAu.

I don’t need to posses gold to use it as a standard. I know what it is and what it weighs and what it is worth. My value is stored as Dollars, but I measure it’s worth in gold. I charge about .8ozAu/Hr. for my time. My house is worth approx. 300ozAu.

I know I must convert to Dollars to conduct transactions, to move value from my bank to yours and so on. But I do not have to Think in Dollars, Evaluate in Dollars, or Calculate in Dollars. That is my choice.

Since I started to do this, I have found that the whole world of finance and economics has changed from a largely ethereal cloud of uncertainty, to a solid edifice of certain value. The conversion from the current spot price gives me a measure of value that is at least 10 times more accurate than the “guess” I would have to make to apply a value to a valueless Dollar.

Do this for yourselves. Do it for just an evening, or a week. Look at past values and convert them to the spot price on those dates or in those years. Look at what you paid for your house in ozAu. Look at what the corrected market price is of it now in ozAu. Measure a dozen eggs, measure the cost of your barbecue. It’s a revelation.

I’ve said this many times here now. Economics is a science only if you measure accurately. To do so, requires an actual standard of measure, especially when the measurement is of a subjective nature. Value Judgment is subjective, and so can only be conducted with actual things as comparators to have any consistency of measure.

Dollars are not actual. A Dollar bill is an actual peice of paper with an Ordinal Number on it. It is not a measuring device for value. It has no unit standard that is stable. There is no definition for it at the NIST. It’s the only unit of “scientific” measure that dosn’t!

A unit of measure is a constant in any equation, except Economics. We need to change this one simple fact if we are ever going to KNOW anything about Economics. The Dollar is a VARIABLE not a CONSTANT.

A weight of Gold is a Constant. Convert value in Dollars to the current market estimation of value, the spot price of gold in dollars, and obtain a measurement in a constant unit of value. Use this when you study your charts and graphs. Use this when you evaluate the market price of things you buy and things you sell. Use this to measure your own worth. Because until you do, you are nothing more than an astrologer, a prognosticator and a magician, not a Scientist.

Current thinking, the thinking in units of Dollars, Euros, Yen etc. is the thinking of esoteric arts, not science. A Scientist must use unit concepts to evaluate a condition. To say the light is “red” is not enough. He must measure the “red” and define it more accurately in order to understand it’s meaning. Until you yourself do the same with wealth value, you only have general knowledge, not accurate measurement

The conversion is simple elementary school math. The hard part is embedding the concept of ozAu in your mind so that you think in ozAu, not Dollars, Euros etc. It’s like going to the metric system. You have to use it to get to know it personally. But when you do, the comparison of 13mm to 1/2in is easy. So too is the comparison of 284ozAu House to a $250,000 House. It becomes easy with practice.

.88ozAu app.= $100 (Today)

We don’t really need a new currency, if we can know what what we have is worth. A new world currency won’t solve anything if we don’t establish a world unit of measure for value. We will never have an Economic Science if our measurements have no objective unit.

When we assign a value, that assignment is subjective, even if the object is actual. eg. The apple is red.

We can choose one apple to be our standard for red, and then gauge all other red objects against that apple and it’s red color. We can take pictures of it, create paints that match it, and measure the frequency of the colors that reflect off it and the ones it absorbs to better define our standard and make our subsequent measurements mor accurate.

In money, we have no standard that can meet even the simplest of criteria such as “red”. The Dollar itself is a conceptual object. It is not actual. You cannot see it, touch it, feel it, hear it, or taste it. It’s value is based on the idea of debt. It’s basis is another concept. It is entirely non-objective until we personally assign a value to it. I do this when I do my billing. I assign a value, my time spent, to a number of Dollars. But now I have assigned a subjective value, to an conceptual object, that has conceptual value of indeterminate quantity! This is not a measurement of any kind! The only object involved in the entire evaluation is…..ME! How can I make an objective comparison in the world if the only objective standard I have in my measurement is ME? I can’t do it. I have to convert any way. So I compare to my car, my house, my work, my time, and I convert, daily, hourly, trying to estimate value with subjective standards.

I gave up. I convert to weight of gold, evaluate in that, then convert back to transact exchange when necessary. And suddenly, my esoteric art of valuation became my science of Economics.

Then the debt backing the money created is worthless as a source of positive income. The potential income from the debt is not realized, and so the debt itself has no real value. Only the house, and the man have real value. The value of the debt can only be realized by the man, living, working, and paying for that remaining 25 years. If he dies, or looses his source of income, the debt remains unserviced, unactualized, and therefore valueless.

The loan was based on a value that has no fixed meaning over time, no intrinsic value that is stable and directly measurable, and no basis of comparison that is consistent. If the house was over valued at the time the loan was made, then the reason for the over valuation is that the measurement of it’s value was in a variable unit standard. It was measured in dollars which change their unit value over time. It was measured with an unknown quantity.

This is precicely why it is nessesary to re-evaluate our world in units that are consistent. Otherwise, what happens is that the estimates of value in the variable unit, ie. dollars, will tend to be estimated higher rather than lower as time goes by. Since the estimates are inaccurate, and we are humans looking for value gain, we tend over time to err on the side of gain.

This accumulated error in measurement leads directly to the inflation of price, an over estimate of true value.

The house, if over valued was an unrealized loss at the time of purchace, and the loss will be realized when the man dies, loses his job, or pays off the loan.

He will own a home, if his lives and pays, that cost him twice as much in gold as he received in actual value as a house.

The house was purchaced for 568ozAu.
The house was worth 454ozAu.
The payment on the debt over the 30years is 1098ozAu.
The loss on the investment is 644ozAu.

That is not just upside down for $100,000. That is a total negative return of -150%

Now how does it look? He’s paying the bank to go broke, even if he lives and makes the payments!!!