We can't afford to allow shadow economies to grow this big.

Toxic Assets Were Hidden Assets
By HERNANDO DE SOTO
http://online.wsj.com/article/SB123793811398132049-email.html

The Obama administration has finally come up with a plan to deal with the real cause of the credit crunch: the infamous "toxic assets" on bank balance sheets that have scared off investors and borrowers, clogging credit markets around the world. But if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on.
Chad Crowe

Today's global crisis -- a loss on paper of more than $50 trillion in stocks, real estate, commodities and operational earnings within 15 months -- cannot be explained only by the default on a meager 7% of subprime mortgages (worth probably no more than $1 trillion) that triggered it. The real villain is the lack of trust in the paper on which they -- and all other assets -- are printed. If we don't restore trust in paper, the next default -- on credit cards or student loans -- will trigger another collapse in paper and bring the world economy to its knees.

If you think about it, everything of value we own travels on property paper. At the beginning of the decade there was about $100 trillion worth of property paper representing tangible goods such as land, buildings, and patents world-wide, and some $170 trillion representing ownership over such semiliquid assets as mortgages, stocks and bonds. Since then, however, aggressive financiers have manufactured what the Bank for International Settlements estimates to be $1 quadrillion worth of new derivatives (mortgage-backed securities, collateralized debt obligations, and credit default swaps) that have flooded the market.

These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and tied to the assets they represent. Nobody knows precisely how many there are, where they are, and who is finally accountable for them. Thus, there is widespread fear that potential borrowers and recipients of capital with too many nonperforming derivatives will be unable to repay their loans. As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property.

(snip)

Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.

Government's main duty now is to bring the whole toxic environment under the rule of law where it will be subject to enforcement. No economic activity based on the public trust should be allowed to operate outside the general principles of property law.

Financial institutions will have to serve society and fully report what they own and what they owe -- just like the rest of us -- so that we get the facts necessary to find our way out of the current maze. They must begin learning to put on paper statements about facts, instead of statements about statements.

dusty corners of these creaky old banks.

The Treasury's fact sheet doesn't address any outside oversight to make sure there is adequate transparency.

Its something I ran across this morning doing some research on this extremely confusing topic.

http://www.reuters.com/article/businessNews/idUSTRE52A7PT20090311?feedType=RSS&feedName=businessNews

Treasury is pulling all the strings on this one with lots of help from......... take your pick..

for the text of the proposal to see if its true or just another rumor.
They want to get these priced, they want to create a market for them, and the sort of transparency they are asking for will enable that.
I am very hopeful.

and that is in fact the entire point. contrary to what we are being told there IS a market for these assets, there ARE willing buyers but the prices they are currently paying are LOW as low as 30 cents on the dollar for "AAA" rated MBS and some deals are being made at these levels. the reason the market is "illiquid" is obvious, the sellers ( banks ) are not selling, there are few willing SELLERS but many willing buyers however banks cannot afford to sell at these levels as it would bankrupt them, so they need to find a way to get the prices UP. that is where timmy`s PPIP comes in, by removing the risk of loss to private investors AND providing the BULK of financing for these deals it is hoped that investors will bid up the prices for these securities ( since there is little or no risk to THEM ) thereby digging the banks out of the hole they are in. the current prices reflect the perception of risk associated with these securities, by removing that risk ( and shifting it to the taxpayer ) they hope to enhance the value of these assets. I see two possible outcomes if this does work... 1.) the true risk has been exaggerated and these securities really are worth more than the market suggests, if this turns out to be true then investors will reap huge gains and taxpayers will get their money back and more ( maybe ) or 2.) these securities are in fact heavily impaired and many will fail to perform or default, in that case the taxpayers would stand to lose HUGE amounts, perhaps many hundreds of billions of dollars over time. is it worth the risk? is there no other way? I guess we will find out................. ( and the higher the prices are the greater the risk of loss to the taxpayer )