muses of the moment

January 22, 2011

Fed accounting gimmicks

Filed under: Housing Market, The Banking Crisis, The Dollar Crisis, The Federal Reserve, US Government Debt — totallygroovygirlfriday @ 1:07 pm

Groovygirl thinks the Fed is anticipating Ron Paul asking uncomfortable questions, like is the Fed bankrupt, prove they are not?

This is truly amazing. Who do they think they are fooling? Unfortunately, since the majority of people do not understand how to read a balance sheet, probably everyone.

Net worth equals assets minus liabilities. If you have a negative net worth and are unable to sell assets, you are bankrupt. The new accounting rule means that they have no liabilities, so their net worth will never be negative. And they will achieve this act of magic permanently by moving their losses (the toxic debt they bought in 2008-2009) to the US Treasury. That’s you, American tax payer.

Amazing… here.

Not exactly sure what they are going to do when they have to buy more toxic mortgages. Maybe that is why they are clearing their liabilities, in anticipation of further removal of more toxic debt from US banks. Toxic debt is growing, we are not done.

Recent banking accounting rules have not gone quite as far as the Fed’s new rules. But has instead allowed banks to value their assets and liabilities (foreclosures and imploded derivatives) for any value they see fit until 2014. Thus hiding the fact that their net worth is really negative and they are bankrupt.

Now the economists on main street media will say that although the defaulted mortgages are losses today, they will regain value, and at some future date, will be valuable assets sold for cash, so indeed should be valued at that future value.

First, this is illegal. The bank will not lend you money based on the future value in 10 years of your home, they lend you money based on the current assessed value.

Second, as Martin Armstrong tells us, we are in a 26-year decline in the housing market, a decline that started in 2007. The banks will NEVER recover the value of their mortgages, toxic or grade A. This is why all US banks are insolvent, period. Accounting gimmicks will not change the coming final 90% contraction in US housing values, finally bottoming somewhere around 2032.

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