No one, especially the Fed, knows how insolvent the banking system truly is. The magnitude of the problem has been deliberately hidden. Banks themselves probably don’t know the value of many assets on their balance sheets. They were ordered/allowed/instructed to keep assets valued at original costs rather than market values. This dictate/allowance was an attempt to hide the true condition of financial institutions. While valuations are grossly overstated, no one has any reasonable way to estimate by how much.
The Federal Reserve has taken many of these toxic assets off the books of banks and put them on their own balance sheet at original value. This action was taken to prevent a collapse of the banking system and reliquify the banks. Now the Federal Reserve’s balance sheet is also meaningless to the extent of these (and other) overvalued assets. Even the Fed doesn’t know how bad their balance sheet is overstated. Without markets, valuation is guesswork. The only thing for certain is that these losses were transferred away from private entities and will ultimately be borne by taxpayers.
The last time we had real markets in these assets was when Bear Stearns failed in mid 2007. Since then, the toxic assets have had no market transactions. Irrational enthusiasm, unbounded optimism or outright fraud has been the basis of valuation since.
Bill Buckler describes what happened when Bear Stearns failed:
Bear Stearns was left with two options. It could sell the “assets” in the hedge funds or it could bail them out with its own capital. For the one and only time in the GFC so far, a money centre bank tried to sell Collateralised Debt Obligations (CDOs) on an actual market. That attempt lasted hours. When the auction was closed, the bids were coming in at 30 percent of the face value of the paper. The jig was up, the valuation of the collateral underpinning the entire banking system was revealed as fictitious. Not much more than a year later, that collateral was transferred from the US banking SYSTEM to the Fed, which has maintained its fictitious “value” ever since. Europe dragged its feet, but at the end of 2011 it did the same thing in regard to its own banks.
Ever since that episode of mid 2007, the “market” for pretty well every kind of debt-based financial “asset” there is – up to and including the sovereign debt of governments – has been progressively falsified by governments and their “independent” central banks. Mr Bernanke has now been quoted as describing this procedure as “a work in progress”. It is indeed, and by this time its true nature should be clear to almost everyone. But still Mr Bernanke and all his counterparts in the seats of power all over the world bleat about a “recovery” which is just over an ever receding horizon. What the world needs to “recover” from is the increasingly desperate machinations of governments desperate to retain their power. What it needs to recover is freedom – money – and markets.
The financial system has not been saved. It is a hollow shell waiting to collapse.
There has been no economic recovery and soon there will be the inevitable financial collapse that plunges the world into another Great Depression.