OMG Forbes Actually Got One Right! Hey Timmy, Define "Capital" Please
I am absolutely shocked that Forbes got one right but they did. Sort of.
The U.S. Treasury Department thinks raising capital requirements for U.S. and international banks is the way to save the world from another crisis, but it misses a key problem: establishing what capital is, and how it's measured.Speaking of illiquid assets, I read a wonderful piece on the liquidity argument earlier this evening and must thank Panzner for sending me the contents of his blog reader as it has been an endless source of enlightenment that would have taken me days to compile. brownnosebrownnose, whatever, I appreciate him, bitches.
The proposal also calls for even tougher rules for companies that could pose a threat to overall stability of the financial system. Treasury said the proposal emphasizes higher quality forms of capital that can better absorb losses. Treasury Secretary Tim Geithner will be shopping around Uncle Sam's new idea at the G-20 summit in London with the aim of setting the standards by the end of the year, and implementing them by the end of 2012.
Problem is, not all capital is created equal and complex issues of marking securities values can make one bank seem capitalized while another isn't, even if they own the same loan portfolios, such is the way with illiquid assets.
"If you don't understand what the proper carrying value of a loan or security should be, and if that's not comparable between institutions or banking systems, then setting a new set of standards is of secondary importance," said Brian Olasov, managing director at the law firm McKenna, Long & Aldridge.
Warning, if you're not into the Elliott Wavers, you're not going to appreciate this take on our favorite unintentionally dirty term of the financial crisis, liquidity:
I sometimes get in discussions in the comments section about the term "liquidity". You here it all the time now, its become a buzzword. Now the "G20" is talking about "planning to plan" to remove their stimulus "liquidity". [MW] (of course no actual action is taking place just a lot of talk of planning to plan things)
People and media in general like to use the term liquidity. You here things like "its all about liquidity and liquidity moves the markets" or some such dictum. Or "High Frequency Trading" provides liquidity. Or the choking of liquidity is a therefore a "credit crisis". You here media stories talking about it all the time as if "liquidity" is a living thing in and of itself!
But what does it really mean?
What is liquidity? Breaking it down to its most basic definition I googled the term several times and came up with this: "Market liquidity refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset. "
Sounds ok and something CNBC would approve of (the minimal loss of value part). But is that a truthful or useful definition? Is liquidity a natural occurring substance that can be harnessed or controlled for the good of mankind? Can we drill for liquidity in deep reservoirs under the ocean and provide economic benefit for all? Of course not!
(Ok Dan just get to the point!) I came up with my own set of definitions for liquidity:
1) Liquidity is the easy flow of assets, fiat money and credit from one entity (person) to another.
2) Liquidity in the 21st century is mostly the result of the creation and flow of credit.
3) Liquidity is a state of mind.
Oh dude we are screwed because it appears as though a mass awakening is taking place around the globe that leaves the US all dried up.
I guessed in April that the world might be running out of capital and I don't know anyone personally who actually believes this has ever been a liquidity crisis, and if it is, by the definitions above we can stop the bailout madness now and get realistic about the implications of this.
America's great faith will have to come from somewhere else, and that's the only crisis I can see.