TARP was a way to at best allow these securities to normalize somewhat, potentially allowing the underlying mortgages to come back to closer to normal, and for holders to earn their way out of these securities over time–or at least mitigating the havoc that might be caused by valuing these securities at what they are really worth.
In an August 31 editorial in The Wall Street Journal, “TARP and the Continuing Problem of Toxic Assets,” author Andy Kessler reminds us that we are far from out of the woods, so to speak. The trouble with mark-to-imagination or as Kessler calls it, “mark to wish,” is that it makes it next to impossible to accurately value financial services firms for investment, and hard o believe that the ratings of insurers or banks or brokers who hold this paper are accurate. How can one invest in these firms or advise a client to use a particular insurer if that is the case?
The housing crisis remains in the forefront of the continuing crisis and none of the measures that have been attempted so far have had a real impact on the overhanging inventory of homes Until the backlog of foreclosed homes, and those delinquent but not in foreclosure, is cleared (many say this will take years), it will be difficult to have a sustained period of real growth or recovery.
Kessler suggests three potential solutions: “quantitative easing” for “toxic assets,” or “QE toxic” as he calls it–a Fed buying program for those assets in which they–and by extension WE would hold these assets until they are worked out one way or another.
“Import buyers,” says Kessler, meaning bring in additional, well educated immigrants to take on high-paying jobs and thereby buy up some of the housing inventory.
“Wait,” and let consumers continue to deleverage and work through the (abnormal} cycle. Though Kessler calculates a “$4 trillion” mountain of consumer debt that he says would take seven years to climb out of, he also notes that “we are now three years into it.” That’s at what he calls “normal growth rates.” Which we don’t have now.
It is a good time to remember that these assets have not gone away. They are still under this TARP, and I agree with Kessler that they are just as “toxic” as ever. So what should we do? Marking these assets to market–perhaps even over a period of months or years so that the effect does not make the markets come unglued, may be a start.
What do you think?
Comments? Please send them to [email protected]. Kate McBride, AIF(R), is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.