Blog on the Run: Reloaded

Tuesday, April 13, 2010 10:35 pm

Zombies walk among us …

Filed under: We're so screwed — Lex @ 10:35 pm
Tags: , , ,

… and not the fun kind, John Hussman says:

In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930’s that when you don’t require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.

And how badly overvalued are those banks’ assets? Well, Hussman says, according to economist Dean Baker’s 2009 Congressional testimony, banks have protested that there’s really no well to tell, but in fact (he’s still quoting Baker) there has been an excellent, albeit extremely unpleasant, way to tell. It just isn’t telling banks what they want to hear:

The troubled assets on the banks’ books are overwhelmingly mortgages, both first and second or other junior liens, not mortgage-backed securities. The FDIC has acquired large quantities of mortgages from its takeover of several dozen failed banks over the last year. It auctions these assets off on an ongoing basis. The results of these auctions are available on the FDIC website. Non-performing mortgages typically sell in these auctions at prices in the vicinity of 30 cents on the dollar.

So if we “extend and pretend,” as Hussman calls the administration’s current eyes-averted approach to the problem, what will happen? At best, a decade or more of stagnancy. And we might not get the best. Peachy.

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