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Here is why I say we are in a Depression – because sooner or later, everything will have to be re-valued based on real values rather than supposed values.
Let’s say we have corporation A. This corporation owns an office building which is 90% unoccupied. But on the books of corporation A, this office building is priced u as if it is fully rented. What asset value does that office building then represent? What happens when the market value of those office spaces devolves into a sub-value of what was expected and projected for its capacity? What happens to that asset value when the building and property itself cannot be sold in the marketplace or could only be sold for a value much lower than that paid for it? That is the situation now.
Further, let’s say that corporation A leveraged the asset value of the office building that they own at some time before today. That leverage occurred at an assumption of full or nearly complete occupancy, not at 90% empty. It also occurred at a property value based on expected returns in a marketplace at least 30% higher than it is now. But, the leverage was created based on the old values which no longer apply. Now, what is that asset worth? What value is it given when the leverage based upon it is greater than the value that could be brought from it based in reality?
On the balance sheet of corporation A, what occurs? Where is the actual values of properties owned and assets available against the borrowing and debt obligations that must be made on higher values than reality will bear?
To me, this means that sooner or later adjustments will have to be made in a downward direction. There is no doubt that other credit structures and derivatives were sold based upon the credit extended to corporation A and its assets and properties. Those also will falter in value. It isn’t possible for this system to represent real value nor to flex in accommodation of it, except for situations in which that value continues to increase. It has no flexibility going in the other direction – in a negative valuation event.
For that reason, above and beyond all others, I say that we are in a Depression economic situation and that is what is unfolding before us. The trade deficits that have been maintained over a period of years, the number of bankruptcies registered and administered over the last five years, the true unemployment figures from the US and around the world, and the basic insolvency of the credit based system that has been in use without restraint – all spell out a speculative environment of high-risk, highly leveraged institutions that are failing in light of reality.
I believe that the housing foreclosures are a symptom of the problem, not the cause – but are an indication of the very real fractures occurring in the system. It was never viable to use loans as assets to be traded, sold and used as leverage against asset purchases and obligations as if they were real money. They aren’t. These uses of credit, leverage and loans as a currency has falsified the actual values of everything they have touched and undermined the real values throughout the corporations and government systems that have used them.
The solutions that will work for this situation include putting the precise and appropriate regulations in place before valuing any more of the asset classes involved, placing standard accounting practices into use across the board (regardless of the type of fund, accounts or institution involved), and exchanging credit based assets back to real ones in the marketplace. It will also be a part of any viable solution to take apart the CDOs into their component parts and re-establishing their real values in light of the realities in the marketplace.
Currency and asset values must be re-asserted based upon relative comparisons from the real world and no longer based on credit, loans, leverage, guarantees, future earnings, future taxes, and pretend economics / make-believe accounting practices. When that happens, opportunity can open and be constructed that is available to all with potential for growth, strength and a foundation that is concrete and real to support it.
These and other similar measures must be done or we have nothing and everything that is touched by these eroding values will be worth nothing.
– cricketdiane, 02-25-09