Toxic Assets: Giving Worth to the Worthless

An old maxim: Something's only worth what others are willing to pay for it.

In many respects, that's the simple problem behind our complex economic crisis. Banks have been lending out billions of dollars to American consumers and then 'selling' these loans amongst themselves.

These loans were theoretically valuable - ultimately returning the value of the initial loan and the interest.

Unfortunately, as millions of customers defaulted on their repayments, these 'valuable' resold loans suddenly become effectively worthless.

What we're left with are banks with billions of dollars of 'toxic assets' that aren't actually assets at all. In previous years, they would have been able to loan out additional money using those securities as capital. Unfortunately, that capital doesn't now (if it ever did) exist, so the banks simply don't have the 'real' money to keep on lending. Hence our credit 'crunch.'

Tim Geithner, the head of Obama's treasury, believes that he can fix this credit crisis by getting the 'bad loans' off the bank's balance books. What he proposes is essentially having the taxpayer buy the dodgy securities.

The problem with that plan?

Why should we, the American taxpayer, be left paying top dollar for something that's essentially worthless? Currently, none of the banks are willing to 'man up' and write down these assets at their true value. If they did, those banks might be wiped out - much of their perceived 'capital' comes from ownership of now valueless securities.

So if the taxpayer is forced to buy these 'toxic assets,' we'll find them resembling stereos bought from the Blackbush market. After we've paid your money and got them home, we'll find those fancy, brand-name boxes actually contain nothing but bricks and old newspaper.

Who's to blame and who's going to fix it?

The banks got themselves into this mess, by lending out money to people they should have known would never be able to repay it.

The securities companies were equally guilty by buying these 'assets' - simply assuming that they'd be worth what they were sold at.

The collapse of the economy just exacerbated the situation, as millions of formerly solid mortgage 'assets' have now joined the 'toxic assets', sent 'underwater' as mortgage payers are left owing tens of thousands more than their houses are actually worth.

If Geithner goes through with his scheme and pours real capital into the system, the banks will quite literally be 'bailed out'. They'll receive something for nothing - getting 'real' money for worthless assets. Considering it was their greed and mismanagement that got them into this fix in the first place, is that right? Is that fair? (Do we have any choice in the matter?)

Money for Nothing

As for those 'toxic assets' themselves - if Geithner has his way, they'll belong to the American government - or, more accurately, the taxpayer (i.e. us.)

Some of these loans might still be repaid, meaning the taxpayer will ultimately benefit from their 'investment.' Many, however (something the banks are aware of, which is why none of them are lending any money off the back of them) will inevitably be written off - the taxpayer's billions will have bought nothing when (not if) that happens.

Wherefore art thou, millions?

At first appearance, it might look like billions upon billions of dollars have simply vanished from the system. The truth is that none of them existed in the first place. As the housing bubble grew, inflated by the Democratic mismanagement of Freddie Mac and Frannie Mae, people bought, sold and wagered billions of dollars not on cold, hard cash itself, but on the 'potential' value of risky loans.

Much like a stock is worthless until the moment it's sold, none of these assets were ever actually worth anything until they got repaid - which they didn't.

Therefore, the economic crisis isn't about billions of dollars disappearing - it's more like the story of 'The Emperor's New Clothes.' The crisis came about when somebody whisked away the 'magic screen' and revealed that we'd been growing rich on monopoly money for the past decade.

Which is where what I said earlier becomes so ominous: Something's only worth what others are willing to pay for it.

Nothing for Money

If Tim Geithner spends the taxpayer's billions buying these worthless 'toxic assets' at their 'perceived' value, he gives them value - making real a financial fantasy that never existed in the first place.

He'll be pouring billions into the financial system that simply don't belong there. That 'value' we claim to have lost never existed in the first place. We were only ever playing with monopoly money - fortunes were being made and lost off the back of 'Disney dollars,' not real cash.

Obama's got plenty of sound financial strategy in his 'fix' for the economy, but buying these toxic assets is the worst (even if it is the only) strategy available. It's smoke and mirrors, that will simply save the same financial institutions that got us into this mess in the first place (and doubtless will again.)

What America REALLY needs to do is buckle down and bide by the words of Shakespeare. In Hamlet, Polonius warns: "Neither a borrower, nor a lender be."

From President Bush to President Obama, from the biggest corporations to each of us humble citizens, it's that advice we should listen to. When things are bought on the promise of decades of debt, we don't own them. They own us.