Wednesday, July 07, 2010

Treasures from the threads - Number forty-three

'Welfare for the rich', is the topic for this Telegraph blog posting by AEP from Owainglynwr, (I thought he had been assassinated for twenty pounds at Mortagne-sur-Gironde, but on checking that was Owain Lawgoch a perhaps more legitimate claimant to the title as last truly Welsh Prince of that name?) I digress for what was posted is fascinating and may be read herewith:
Today 01:32 AM
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Amrose you wrote: 'I do think think that the American political class will have to face up to the new reality of a semi-permanent slump for a decade or more that will blight a great number of lives. The cyclical recovery that normally makes it possible for most Americans to find a job if they want one is not going to happen this time because the overhang of debt, fiscal tightening, and a liquidity trap have combined to jam the mechanism.' Agreed. Further on you wrote: 'But once welfare has been deployed so generously for the rich, it cannot be so easily be denied for the poor. This was the Faustian Pact.' By describing stimulus as generous, this implies the welfare deployed for the rich has been enough. Not so I fear. Few politicans could dare to articulate this. What has been deployed so far has been emergency surgery, some I admit, weirdly prescribed by politicans to gain votes and therefore wasted. If banks ATM's for example, ceased delivering savings for any longer than a couple of days, it moves from a simple financial crisis to a law and order issue. Most depositors are unaware when 'their money' is deposited into a bank, it ceases to be 'their money'. It becomes the bank's to do as they see fit. Depositor's have a claim for that amount in return for an agreed interest rate, thats all. So the bond holders had to be appeased, as the banking system was so interdependent with modern life. Mark to market accounting should rightly be suspended in a non functioning market. Yet when times improve and investors appetite returns, for stability and funding its important assets are valued at a fair price for both banks and investors. Easier said than done. Under the new corporate accounting standards rules proposed in the US, banks and other lenders would be required to book their loans at their current market value, a method called mark-to-market accounting. Previously, they had more leeway in valuing assets, so long as they expected to hold them for a long period of time. Critics call that approach “mark to make believe.” The question is are there banks and other lenders engaged in denying crystalizing losses? European banks and governments for example are experincing what happens when investors question the validity of their accounting systems. Pushing on a string for funding at any reasonable price. US Banks already use mark-to-market accounting for stocks and complex mortgage bonds whose value fluctuates through daily trading. The change in the way they treat the value of loans, however, will be greeted with fierce opposition from banks. Banks claim that the change in the way they treat the value of loans would force them to take big losses on loans during periods of economic distress. Doing so would mislead investors, they say, because the loans would probably still pay off over time even if they were trading at lower market prices. 'Risk Off' investors however, might call mark to market accounting for loans prudent. Big US investment banks, have traditionally used mark-to-market accounting. So stress testing for these large US banks has been well regarded by investors. For regional and community banks that make commercial loans — the vast majority of the USA's 8,000 lenders — the impact could be well, drastic. This is the catch- 22. Fail to recognise poorly performing loans adequately not just the outright delinquent, investors will avoid funding to those regional and community banks. Currently I believe Spain's cajas are experiencing this. Tighten and credit for the poor and the private sector which help generate the growth needed to get the unemployed back to work will be dramatically reduced. Welfare for the rich Ambrose before the poor can benefit, still has some way to go. Unless carefully handled politically, the next stage in this ongoing crisis (it never really went away, despite the media hype) could be generated by accounting standards not applied consistently internationally. The vast majority of the public remain blissfully unaware. Politicans are still blaming the 'greedy bankers' for the 'past' crisis. Labour politicans are a prime example. They are deluded if they do not see Depression 2 could still quite easily beckon. The 'rich' in America and Europe might still need welfare as a matter of urgency before the poor.



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