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HistoricalPEGuy (63.34)

Writedowns: So Where Did The Money Go?

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December 20, 2007 – Comments (6)

Morgan Stanley writes down an unbelievable amount of cash.  Banks are getting crushed with tons of losses.  I am sure they'll be ok at the end, but many a good fool has helped me understand that it's not wise to try and predict this downfall.  Further research has proven that the fool community is right on - should I expect less?

What I want to know is, where is the billions and billions of dollars ending up?  Leaving monetary policy out for now (but not later) --- the market is the same as physical mechanics --- money (or energy) is conserved.  What does that mean?  It means that if banks are writing off billions and billions of dollars - somebody, somewhere is lining their pockets.  So who is it?  Here are my best guesses, but I'd love to hear the community's opinions.

1) Lower Middle Class - Is this the ultimate tax break and federal program for the lower middle class?  "No worries on you loans.  Don't pay.  We've got you covered.  You bought a house you couldn't afford.  Go ahead and default and ruin your credit, but you don't owe another cent to anyone".  Is this where the money went?  Bankruptcy is no picnic, but relieving people of their debt isn't exactly harsh either.  Is this credit crunch injecting money into the lower middle class?  Hmmm... I don't know.  But I'm interested to find out.

2) Homebuilders --- Build, build, build, make money and run.  Why not.  That's what the bubble was all about.  Plenty of unqualified buyers ready to go.  So, are the execs of homebuilder corprorations sitting pretty?  After the plunge, it wouldn't seem so --- but there was a major uptick in both stock prices and cash flow for many of the homebuilder equities.  Is this where the banks gave their money?

3) Thin Air --- Due to the Fed's policy and manipulation of rates, did they just create "funny money" to get absorbed by the ether?  Clearly, the deep cuts in the price of money have fueled the bubble.  Maybe, just maybe, you can inject a bunch of cash into the system and watch it all disappear.  Nobody benefits - its just a black hole that the market absorbs.  If the Fed rate is very different from what the market thinks the rate should be, this doesn't actually sound that rediculous (but still an odd look at macro ecomonic theory).

4) Inflation --- Finally, the one that probably makes the most sense, is that all this money is just boosting prices, wages and the overall expenditures that people and corporations make every day.  The housing bubble simply generated even more cash in the market place - much more than the Fed intended to - because now, the banks are chipping in - on the billion dollar level.  Not only are we borrowing more and more, but we've got an injection of billions of dollars from the banks.  What a scary thought, but it seems the most logical to me.  Inflation with stagnant growth makes me think --- early 1980s here we come!

Who knows what the future will hold, but I can't wait to see how it all shakes out.

-- HPEGuy

6 Comments – Post Your Own

#1) On December 20, 2007 at 3:52 AM, cluelessmorgan (73.61) wrote:

The solution to too much borrowing seems to be to borrow more.  Its absurd isn't it?

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#2) On December 20, 2007 at 7:36 AM, devoish (96.39) wrote:

History says that the wealthy insiders get screwed by small individual investors, right?

From TMFbent: http://www.secform4.com/insider-trading/1181599.htm

From CR: http://calculatedrisk.blogspot.com/2007_11_01_archive.html 

http://calculatedrisk.blogspot.com/2007/12/montana-connecticut-siv-bagholders.html

http://calculatedrisk.blogspot.com/2007/06/reelin-in-suckers.html

Have you called your school district to warn them that when their AAA rated securities are returned at .85 on the dollar you will be perfectly happy to replace that money with your tax dollars? My school district assured me that our money was in treasuries. I hope they are correct.

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#3) On December 20, 2007 at 7:54 AM, devoish (96.39) wrote:

Everyone. You really should read the last link from above. Reelin in the suckers.

Have nice day.

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#4) On December 20, 2007 at 12:25 PM, chk999longonly (99.40) wrote:

Money is not like energy, it is not conserved. Because many investments (stocks, real estate and to a lesser degree bonds) are priced at the margin, wealth is created and destroyed constantly.

For an example, consider stocks. Assume the XYZ corp has 10,000,000 shares outstanding. To make it easy to see, assume that 9,000,000 of them are held by pension funds and are never traded. The price of the stock is set by the 1,000,000 shares that trade. Since the price is set in an auction format, when there are more buyers the price goes up some, and when there are more sellers the price goes down some. Suppose the price has been at $10.00 a share. If there were more buyers for some reason the price could easily go up a dollar to 11 a share. Even though the 9,000,000 shares that never trade did nothing, the pension funds that own them are now worth 99,000,000 rather than the 90,000,000 they were before the price change. This also happens the other way in that if the price dropped to 9 a share, suddenly the pension funds are worth 81,000,000. This is where a lot of the money has gone, assets have re-priced and the value those assets where held at just changed. Since a lot of the securities in question were backed by mortgages, if those mortgages have a much larger than expected default rate, then the securities are worth really a lot less than they were originally valued at.

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#5) On December 20, 2007 at 1:15 PM, GS751 (27.55) wrote:

the printing presses will be running at full blast for awhile.  Did any of you all see that post awhile back that had video link to the history of the fed it was pretty interesting.

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#6) On December 22, 2007 at 12:10 AM, HistoricalPEGuy (63.34) wrote:

chk999longonly - I would just say I respectfully disagree.  The fed is the only mechanism where money gets printed for pulled.  In every other transaction, money flows from one party to another.  It might be hard to track, but it happens.

If the price of gold drops 50% - then for those that hold gold, money evaporates.  But what about all those people that sold gold at the higher prices?  What about the mines that dug it out of the ground and got a great price?  You are talking about funds and products - not where the money actually flows in the end.  Money is like energy (again, without regard to the Fed) - it is conserved.  For every purchase of an equity, there must be a seller.  Fory XYZ company to have 10,000,000 shares outstandding in the first place, means somebody or company received the benefits of that stock offering.  I just don't agree with your statement - can somebody prove otherwise?  I'd love to learn why my argument is wrong!

-- HPEGuy

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