2009 (illusory successful end of Dodd Plan): AssetsLiabilitiesGood Assets450Debt475Cash50Contingent claim25ShitpileTM 2.025Equity25 2010 (height of next bubble): AssetsLiabilitiesGood Assets500Debt525ShitpileTM 2.050Equity25 2011 (next crash starts): AssetsLiabilitiesGood Assets475Debt500ShitpileTM 2.025Equity0
2010 (height of next bubble):
2011 (next crash starts):
Also, in a crisis of confidence, would the price of Good Assets fall, too? *Lunatic*, n. One whose delusions are out of fashion.
Others may be "warrant" (I see it should be equivalent with "contingent claim" in this case, which you sufficiently explain; but don't know what to associate at in general, knowing only "arrest warrant") and "short-selling". *Lunatic*, n. One whose delusions are out of fashion.
I fail to see how that would make the bank more insolvent. Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
What, then, is the downside to taking over the existing banks? (case when the contingent claims are exercised by reselling Shitpile™ at a loss)
And if the rescue of the banks allows them to be profitable again and the tresury can resell the Shitpile™ at a profit, then it will have been proven that the problem was one of liquidity (if you believe the problem is one of solvency then you will end up in the previous case). A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
You are going with the assumption that Treasury would take over those banks, eventually. But I assume banks don't really want to be taken over, and that based on past performance and lack of changed rules, they can avert it: they can become profitable again on paper with another bubble to the extent of weathering even if Treasure re-sells ShitpileTM 1.0 without a profit. And then an even bigger cycle starts.
So, is "liquidity" the key to an indefinite extension of this pyramid game, or do you mean something else? *Lunatic*, n. One whose delusions are out of fashion.
The only way to buy Shitpile™ is on cash, a leveraged purchase is too risky on the downside and leveraged purchases are more vulnerable the longer you intend to hold the assets. So if you're Warren Buffet and you're swimming in cash, or you're Bernanke/Paulson and can manufacture cash, you can buy Shitpile™ and hold it to maturity.
Now, the policy question is, can you unlock the liquidity and then set a monetary and fiscal policy that doesn't allow a repeat of the bubble?
The alternative view is that the "preposterously" high default and low recovery rates implied by the Shitpile™ prices are actually "accurate", and then you have a solvency problem. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
My argument was that the two go hand in hand: to prevent the repeat of the bubble, or a new bubble based on other exotic financial instruments that weren't subject to the loss of confidence (hence ShitpileTM 2.0), these markets have to be closed, from which it follows that the ShitpileTM bought by Treasury should not be up for re-sale even in theory. I'm not sure even holding to maturity is compatible with that. *Lunatic*, n. One whose delusions are out of fashion.
The domino is a linear cascade. The sandpile model is much better because sites toppling can cause their neighbours in every direction (usually 4) to topple as well.
When I adapt the sandpile model to finance I'm going to call it the Shitpile model. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
freud must be giggling in his grave.
time to pull our collective finger out and evolve to a jungian era...
~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~
