We hear quite regularly from various different sources that one of the problems that the finance and banking sector faces today is that they have a bunch of assets on their books that they don't know how to value because "no one is trading" these assets... the reason being that there "aren't any buyers".
This seems like rather a peculiar situation and I can only imagine it implies one of three things:
I doubt the value of these assets is zero - the majority of these assets are, in fact, debt in one form or another and if you gave me the right to collect mortgage payments from Joe Shmoe each month (i.e. you gave me his debt) for free then I'd certainly take it - hey, that's free money!
So which of the other two things is happening here?
But surely those losses would only be realized when the home owners can't meet their loans and go into foreclosure... until then, these "assets" are loans who's price is determined by what the market anticipates is the risk that the home owners will default. If you offered the investors (even in this forum) those loans at, say, $1 for every $100 that was loaned then probably a good deal of investors would take that bet - the bet that no more than 99% of the loans would default.
So presumably there is SOME market price for these assets. What you're saying then is that at the market price these banks are bankrupt right? If they had to sell the assets for what they're worth (and indeed lots of them do have to sell the assets becuase until they do so their books don't balance) then they'd be bankrupt. They have a choice between bankruptcy and bankruptcy - so they sit there in their life rafts waiting for the Fed to come and save them with the savings of anyone that has the misfortune to hold US dollars?
Is there any other possible route the Fed could take at this point? I realize it's theoretically possible for them to let those banks which are insolvent go under (and in the long run that might indeed be the best possible solution - although plenty of people would loose plenty of savings if that did occur... it wouldn't just be the banks that went under - the majority of those savings are held by the Jane Doe public) but Bernake would get lynched by Bush and the Wall Street guys if he did that right? And indeed Jane Doe would probably get really pissy too, so his back's more or less against the wall right?
jimmy:We hear quite regularly from various different sources that one of the problems that the finance and banking sector faces today is that they have a bunch of assets on their books that they don't know how to value because "no one is trading" these assets... the reason being that there "aren't any buyers".
This is just one side. There is another side - "aren't any sellers". Although it sounds silly in this case. The difference of what you have and what you want creates the market. Moreover, it has to be balanced, i.e., for some amount of "want" you should have some amount of "don't want" at some given price. If these amounts are equal, you can get the price.
There's a catch with the credits markets (at least there was before the credit crunch) on the supply side - it is not scarce due to excess of fiat money.
Don't confuse "price" and "value". Value is subjective as Austrian economics teaches us. So, to answer your question, the value of those assets are determined by your time preferences (mostly), while the price mathematically speaking is not defined when no one is trading.