HYPERINFLATION VS DEFLATION

[morganist]

Quote from piezoe:

Do either of you two guys who are arguing here allow for the possibility that the collateral held on the Fed balance sheet may have been mispriced, priced way too low that is, when they acquired it? If so, is it possible that Bernanke and company will have the last laugh when 20 years from now they turn out to be geniuses.

No it is definitley not underpriced. The amount of bad debt out there will make sure the value of the products fall even further and more bailouts will be required. I can almost guarantee you of that. There is likely to be another credit crunch soon.

Read below.

http://morganisteconomics.blogspot.co.uk/2012/07/the-ostrich-removes-its-head-from.html

 

[StarDust9182]

Quote from piezoe:

Do either of you two guys who are arguing here allow for the possibility that the collateral held on the Fed balance sheet may have been mispriced, priced way too low that is, when they acquired it? If so, is it possible that Bernanke and company will have the last laugh when 20 years from now they turn out to be geniuses.

Do people really forget what happened only 4 years ago?

Congress was put on notice under huge pressure to approve TARP or the monetary system of the world would be destroyed. Do you forget that an outcry went up over buying debt from "insolvent" Banks (supposedly mark-to-nomoremarket) and the securities were bought at prices set by the banks! Does anyone see the US housing market making new 20 year highs any time soon?

Citizens own all of it now along with AIG and FAE and many failed smaller banks. A good negotiator would have paid 10 cents on the dollar like any other bankruptcy negotiations with banks not 100 cents on the dollar. It is a sad situation for a great country.

I think that the American middle class has taken the hit that the banks were going to take when the housing market fell apart. The entire house pumping scheme started under Greenspan to avoid a recession in 2001. Remember the Greenspan put (recently renamed to the Bernanke put).

Finally, the banks were struggling to get rid of securities. Are they so poorly run as to get rid of stuff below market value 20 years out and give congress a deal? Would you do that in similar circumstances?

I sure hope you are right and 20 years from now all will be well with the US dollar and the American middle class is soaring high again.

 

[piezoe]

Well then, I guess we are all screwed. Or are we? The question I have is whether these securities that the Fed took off the banks hands were just used as collateral, or did the Fed purchase them? Or perhaps both categories pertain.

I happen to agree with Soros that the market virtually always distorts prices. I would think, therefore, that when the market collapsed for securitized mortgages, that that event would have distorted prices to well below what they should have been after allowing for defaults among the bundled mortgage bonds. There was no "reasonable" market for these debt obligations from the banks' point of view. So to help out the banks the Fed stepped in and allowed them as collateral, possibly at par, possibly discounted. (I am right about this, aren't I? The Fed loaned against them rather then actually buying the securities?)

If the Fed actually bought the securities surely they would have been discounted. If they are just holding them as collateral, then as the banks recover they are going to have to pay off their loans from the Fed. So far as I know Ben does not walk into a bank and write a check no strings attached.

Either way I don't see the situations as quite so dire as most of you seem to. I think what the Fed did was damn clever!

I suppose the reason I hold such alien ideas is that I clearly haven't been watching enough You Tube videos about the monster Fed.

 

[morganist]

Quote from piezoe:

Well then, I guess we are all screwed. Or are we? The question I have is whether these securities that the Fed took off the banks hands were just used as collateral, or did the Fed purchase them? Or perhaps both categories pertain.

I happen to agree with Soros that the market virtually always distorts prices. I would think, therefore, that when the market collapsed for securitized mortgages, that that event would have distorted prices to well below what they should have been after allowing for defaults among the bundled mortgage bonds. There was no "reasonable" market for these debt obligations from the banks' point of view. So to help out the banks the Fed stepped in and allowed them as collateral, possibly at par, possibly discounted. (I am right about this, aren't I? The Fed loaned against them rather then actually buying the securities?)

If the Fed actually bought the securities surely they would have been discounted. If they are just holding them as collateral, then as the banks recover they are going to have to pay off their loans from the Fed. So far as I know Ben does not walk into a bank and write a check no strings attached.

Either way I don't see the situations as quite so dire as most of you seem to. I think what the Fed did was damn clever!

Try and look at it another way. Can people pay those mortgages off. If they can't they are bad debt in waiting. Can you see those mortgages being paid off?

 

[piezoe]

Quote from morganist:

Try and look at it another way. Can people pay those mortgages off. If they can't they are bad debt in waiting. Can you see those mortgages being paid off?

I think there have been many foreclosures and will be still more. I expect some of the mortgages underlying these securities to be restructured, a process in progress, and the majority to be paid off, as opposed to the majority defaulting. In any case, there is a hard asset underlying each mortgage, though many of these assets may be underwater at this time. Both our views may be distorted by news events with the truth lying somewhere between.

 

[morganist]

Quote from piezoe:

I think there have been many foreclosures and will be still more, but discounting these securities to zero is nonsense. I expect some of the mortgages underlying these securities to be restructured, a process in progress, and the majority to be paid off, as opposed to the majority defaulting. Both our views may be distorted by news events with the truth lying somewhere between.

There will be enough to guarantee a net loss, which contradicts your argument.

 

[piezoe]

Quote from morganist:

There will be enough to guarantee a net loss, which contradicts your argument.

We don't know if my argument is contradicted until we know if the Fed bought or loaned against the securities, and whether at par or at discount. We, in fact, do not know the precise terms of the arrangement with the banks, do we?

At worst it would seem that any losses should be quite contained and manageable, and well worthwhile considering what was gained.

We won't know for another twenty years how this is going to play out, because of all the hard assets underlying these loans and the slow movement of prices in an overbuilt real estate market.

I'll almost certainly be dead in twenty years, so you'll not get to gloat and say "I told you so."

 

[piezoe]

Actually, I just asked a question, then allowed myself to be manipulated into owning an argument.

 

[StarDust9182]

Quote from piezoe:

We don't know if my argument is contradicted until we know if the Fed bought or loaned against the securities, and whether at par or at discount. We, in fact, do not know the precise terms of the arrangement with the banks, do we?

At worst it would seem that any losses should be quite contained and manageable, and well worthwhile considering what was gained.

We won't know for another twenty years how this is going to play out, because of all the hard assets underlying these loans and the slow movement of prices in an overbuilt real estate market.

I'll almost certainly be dead in twenty years, so you'll not get to gloat and say "I told you so."

I respect you taking an opposite position. That is what makes a market.

I read lots and lots of stuff, even the nutty articles, in order to glean my own perception of the murky and unknown reality, in order to place my trades. The objective, like you is to make money and not be right or wrong. Both of us will switch positions instantly if we switch our views.

I don't think we have to be screwed and even in the worst case, tomorrow will come (unless the Mayan calendar was right LOL). Its just that every day, the correct (and inevitable corrective actions) are delayed, the worse things get. It can be fixed but the probability of the politicians finding the correct solution is very low.

Gloating is useless, since we all know that any of us can be wrong about opinions posing as facts. (LOL - however, I may be facing the other way in my own plot in 20 years! You would understand.)

 

[piezoe]