Actually, I'm understating the extent of the problem and the importance of the solution.
Take a look at today's WSJ Outlook piece in which the problem in the banking industry is explained as one where no one knows what things are worth. That's because of opacity.
Some people fear a Japanese style recession in this country. There are a number of similarities that bear watching.
First, the Japanese recession began with the overvaluation of their real estate. In 1989, the value of all Japanese real estate was imputed to be about $15 trillion. That's a high price for land about the size of Montana.
Tax laws in Japan at the time conspired to lock in capital gains instead of allowing companies to sell land and realize the gains. So, the financial engineers went to work and devised a plan whereby banks would lend up to 120% of the value of the real estate, permitting the owners to realize the value of their warehouses and also pay interest back to the banks for a few years.
When the bubble burst, the banks held assets on the balance sheets that were simply not worth what they carried them at. But, being Japan, they refused to take major write downs and clear them off. The result, some believe, has been anemic growth for 15+ years.
The similarity with the current situation in the US cannot be dismissed. While banks are writing down the ABS, the securities are not trading!
This is the only permanent solution. |
