[caption id="attachment_2127" align="alignright" width="150" caption="Photo from Health and Wealth"][/caption]
Shares in US enjoyed a breather early this week when US Treasury Secretary Tim Geithner announced his new plan to rid banks of toxic assets. In my opinion, this Public-Private Investment Program (PPIP) will require the US government to print more money which may result in devaluation of the US currency as well as hyper inflation in years to come. However, they are in desperation to do something or else the whole US economy will collapse earlier than we will like to see. Perhaps I can share a bit, based on my limited knowledge, why this move is better than not doing anything at all.
The need to boost liquidity
Imagine bank A had lend out billions in mortgage loans over the years. In the past 1 year, there was lots of defaults and the bank are not able to collect the cash as expected. The bank have to take-over the houses where the loans defaulted. The bank is now holding on to plenty of assets but no cash. The worst is that there are no market for these assets and nobody know how much these assets are worth?
Notewithstanding that the banks, with their initial expected cashflow, issued bonds and securities which resulted in high level of debts and end up with little money to finance a normal commercial operation in the private sectors. To make things worst, all banks are doubtful of each other and refuse to lend money as usual. They are reluctant to raise that extra capital needed to take advantage of business opportunities and are affecting the whole economy.
Creating market value for toxic assets
As mentioned earlier, the banks are holding on to plenty of such toxic assets and are not able to value them due to lack of buyers. Without government intervention, buyers will forever wait till and see until a market price for these assets are more firm. However, such a day may never comes... The government is now trying to create an interest to the private sector. This interest will help find a market value for these toxic assets. Read more...