Liquidity

[Jerome Scuggs]

http://www.usc.edu/schools/business/FBE/seminars/papers/F_4-2-09_COVAL-cjs.pdf

"...the pricing of investment-grade corporate credit has largely been consistent with that of the equity market when viewed through the structural model. In other words, from the context of the structural model, there should be nothing particularly surprising about the severe widening of credit spreads in the investment grade CDX [credit index] and the underlying cash bond credit spreads. Indeed the observed widening of the CDX spread is, if anything, somewhat low relative to what the structural model forecasts conditional on the market declining by 40% and its long-term volatility doubling. The out-of-sample results challenge the commonly advocated view that the pricing of credit securities has become distressed, and instead suggest that spreads on the synthetic securities are unusually low."

This was just released - an extensive study of the "liquidity crisis" by some people over at harvard. I must stress how "unbiased", and more specifically, "non-austrian", the study was - because it pretty much verifies what the Austrian position has been all along: that there is no "liquidity crisis", banks were fine, and most importantly: that the bank bailouts have been computely useless at best, and horribly catastrophic at worst. Oh, and what of all the laws passed in the name of the supposed "crisis"? Hmm.

Poor Keynes!

[Summa]

Ok, I read the intro to this and there are many economic terms that I don't understand. Would someone mind giving as unbiased of a rundown as possible? Or maybe amongst the 33 pages gather pertinent quotes or pages so I am not sifting through 33 pages of terms that I don't understand.

[Jerome Scuggs]

the pricing of the toxic assets of the banks is in line with the pricing of other risky assets. there is no evidence that prices of credit instruments are now reflecting fire sales or distress selling. the evidence, if anything, suggests that the prices are actually on the high side... meaning that the liquidity rationale of the Keynesians has no basis in fact.

the paper is basically a 33-page number-crunch analysis supporting this statement.

edit: ok i'll find some quote

"The government’s view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals...The main objective of this paper is to determine whether fire sales are required to explain prices currently observed in credit markets...A key distinction between the fire sale view and the other possibilities is that only the fire sale view requires that current prices are incorrect."

"The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing."

^emphasis here. my argument is that the depression is a time for re-ordering, while the mainstream position is that everything is descending into chaos. according to this paper, i was correct - the economic problems were indicative of a market that needed reorganizing. jerome 1, hippies nil

"In contrast to the main argument in favor of using government funds to help purchase structured credit securities, we find little evidence that suggests these markets are experiencing fire sales."

"...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."

^i put emphasis on this, because this was one of the main points of contention in the hyperinflation thread. i was right: banks are legitimately insolvent because they are stupid, not because of a "crisis". jerome 2, hippies nil

"...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."

"...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay – and perhaps even worsen – the day of reckoning."

^haha, i could sue these guys for plagiarism

you guys can go "Vet" the authors - but let me tell you now, none of the sixty references cited have anything to do with austrian economics. my position has been found to be accurate, by independent authors. awesome.

[Kolar]

Isn't the problem in not moving the toxic assets as in selling them off as if they were normal, but in that they represent enormous risk to carry. Or does that fact devalue it alone? When all of these high risk mortgages were bundled together (and given triple A ratings) a small percentage of each were packaged and financed through these now toxic assets, doesn't it make sense that even now their actual value may be inflated or even impossible to figure out? If you are right why aren't the banks lending?

[Jerome Scuggs]

the point when these derivatives were impossible or hard to figure out was back when everyone thought things were OK. when they were re-valued in 2008, their prices dropped dramatically. the assets were definitely priced - it's just that they were priced so low, they became virtually worthless because noone would buy them.

of course, if you're the fed, this doesn't make sense. because the FED is going to be the last to admit they created a bubble - they do not think prices are returning to normal, they think there is some "error" in the pricing, and the current state is a state of "unbalance".

the "uncertainty" of the prices comes into play because the USFG, in buying these assets, had to create their own prices - at levels above the current, rock-bottom prices. but what standard would they use?

if i am right, then the banks are not lending for obvious reasons: they're broke. they can't. but i think you're misinterpreting my statement that banks "are fine", i meant that they were fine as far as any sort of "credit crisis" was concerned. they're fucked, but it's not because of some mysterious economic slump. they are fucked because of the same reason General Motors is fucked.

[Jeenyuss]

jerome how have you been man

[Nycle]

How dare you question whether there is a liquidity crisis or not?

Now, the IMF will slap you with some money for this heresy speak.

[T3l Ca7]

Well the government has to do something, it is like giving placebo to someone who suffers from severe periodic pain. Even if nothing on the face of earth could cure the pain, it would make person feel better just because the doctor prescribed something (as long as the person stayed ignorant).

Same with the economic cycle. If you had any economic knowledge, you would know the recession won't go away so quickly. Yet, your government needs to do something to stop people from panicking.

Who to blame: those greedy bastards who created babbles in the first place and your government who allowed the babbles to keep on growing.

Old saying, whatever goes up (irrationally), comes down.

[Jerome Scuggs]

you should read up on the recession of 1920-21. you probably havent heard of it because the government did absolutely nothing. you might have heard about the recession they tried to stop seven years later, though.

[castromarx]

Old saying, whatever goes up (irrationally), comes down.

I hope you're right because at this coke party a while ago I did way too much viagra and I've had a raging monument of a dick for weeks. I could use some o' that liquidity there.

How about that economy, eh?

Hi Jeenyuss.

[brookus]

you should read up on the recession of 1920-21. you probably havent heard of it because the government did absolutely nothing. you might have heard about the recession they tried to stop seven years later, though.

Gee, what could possibly have caused a slow down in the economy in North America and Europe in 1920 and 1921? If only there were some major event where a lot of spending was being done that came to an end before that time.

You really can't be this dense can you? I assume by "they" you mean Republicans? You do understand why Hoover didn't get re-elected right? You do understand why the Democrats took over in 1932 and what happened shortly afterwards to unemployment and GDP right? You also know what happened in 1937 to cause the "recession in the depression" right?

As far as no liquidity crisis. I'm sure the banks will be thrilled to know that! You should send them all an email.

llater,
Tony

[DoTheFandango]

do you get baked and watch C-Span?
I bet you do

[Jerome Scuggs]

Gee, what could possibly have caused a slow down in the economy in North America and Europe in 1920 and 1921? If only there were some major event where a lot of spending was being done that came to an end before that time.

You were probably so excited by your own clever sarcasm that you forgot to notice that 1) that has no effect whatsoever on the fact that there was a recession (regardless of cause) and 2) i knew it anyways. (I actually discussed that recession in another thread on business cycles)

You really can't be this dense can you? I assume by "they" you mean Republicans? You do understand why Hoover didn't get re-elected right? You do understand why the Democrats took over in 1932 and what happened shortly afterwards to unemployment and GDP right? You also know what happened in 1937 to cause the "recession in the depression" right?

You do understand that Hoover wasn't president, right? Unless you're talking about the Great Depression. In that case, I will simply direct you over to read FDR's party platform, which railed against Hoover's excessive spending and government expansion. Why would FDR focus his first election campaign on those things, if Hoover was the guy who "did nothing"? And why would we elect a man who claimed Hoover was spending too much - surely we wouldn't elect someone who was obviously out of touch with reality, would we?

I really do not know what happened in 1932 and 1937, but unless the events were "the end of the great depression", then it doesn't matter.

As far as no liquidity crisis. I'm sure the banks will be thrilled to know that! You should send them all an email.

You couldn't be that dense, could you, my friend?

[PaulOakenfold]

do you get baked and watch C-Span?
I bet you do

it's called autism

[Jerome Scuggs]

i don't watch c-span and i don't have autism, i just happen to think. maybe that will one day become an internet meme, this "thinking"