Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
The problem, as I see it, is that no one seems to know what the toxic assets hidden on and off financial balance sheets are actually worth, or might be worth in the future.
You linked to Jerome's Depressed on Daily Kos where he says
Many people are worrying about the value of assets on banks' balance sheets. Is it 95 cents on the dollar? 60? less? Many people make it as if that were the biggest problem.

It is not. The worst that an happen to an asset is that its value falls to zero, so the maximum size of the problem is known.

What is not known is the size of the liabilities. ...

Again: the bigger problem is not worthless assets, it's unlimited liabilities on all the financial bets that were made.

What is so depressing is that money is being thrown at banks in the guise of solving the asset problem, when it goes to not solving the liabilities problem (because it's so much bigger) - and that markets know that it's not solving anything (they have the liabilities on their books, and guess that others have the same).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Sun Mar 22nd, 2009 at 04:43:56 PM EST
Insolvency arises where assets are insufficient to cover liabilities, so both sides of the balance sheet are relevant.  However Jeromes point about the unknown extend of the liabilities - possibly multiples of world GDP???!!!??? - is just another reason why the taxpayer really shouldn't go there and try to bail those people out.

By all means deal with the consequences of major insolvencies by protecting downstream business in the real economy who still have a productive role to play in generating wealth and employment and who need working capital, credit guarantees, and possibly even help write off some of their debts wheer these were caused by the "bad banks" - but such actions should be on a case by case basis - as in Ford and GM, in response to specific business plans as to how those business can remain productive/viable.

 The sums committed to bail-outs for the productive sector so far is minuscule compared to the sums which may be required to bail-out shadowy business which made speculators rich but which never made a major contribution to the real economy in the first place.  These businesses are so insolvent as to be beyond rescue in any case - we have no choice but to find other ways of meeting the legitimate financial services needs of the real economy.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Mar 22nd, 2009 at 06:27:07 PM EST
[ Parent ]
trying to keep the banks the way they were is increasingly reminding me of Hemingway's 'the old man and the sea'.

by the time they get back to port their fish is going to be a skeleton...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Mar 23rd, 2009 at 05:17:09 PM EST
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