Toxic Assets and Toxic Words

toxic L toxicum, a poison; Gr toxicon,  a poison, orig., poison in which arrows were dipped. 1. of, affected by, or caused by a toxin, or poison. 2. acting as a poison; poisonous n. a toxic substance; also, something contaminated by a toxic substance.

Many of the words being newly used these days are as toxic as the toxic assets we hear so much about.

Nationalization

This term was in vogue for a while, but it seems to be waning. That's good because it was being used to describe a common practice in the resolution of troubled banks that had never been called nationalization, with all its implication of socialism.  Most financial TV commentators are too young to remember the banking or S&L crises of the late 1980s.

Printing money

Take your pick: either the Fed has never printed money and still isn't, or the Fed has always printed money and is just doing it at a faster pace since last September.

Of course the Fed doesn't literally print money. Economists know that and are just trying to be dramatic when they use the term in the current context. I've come to realize, however, that many non economists believe that the Fed literally prints money.

You might say the Fed creates money when it purchases assets, but the public decides how much of the newly created money results in more printed currency. If the public wants more, it cashes checks at banks. If the banks' inventory runs low, they order more from the Fed. If the Fed's inventory runs low, it orders more from the Bureau of Engraving and Printing, which does print money.

Toxic Assets

"We've got to get the toxic assets off the banks' balance sheets." If we're talking about mortgage backed securities, I would say the banks don't have toxic assets on their balance sheets. Their MBS's are illiquid, because some of the mortgages behind them are defaulting and investors don't know where they are and have stopped trading. The second definition of toxic above might be stretched to say the securities have become toxic as they were contaminated by the toxic mortgages. I prefer illiquid for the MBS's because that better describes why banks may choose to hold them rather than sell them at fire sale prices. Besides, illiquid is less inflammatory than toxic and more accurate. The word toxic is itself toxic. We should remember that getting assets off a bank's balance sheet is a means to an end, not the end itself. Holding them to recovery serves the same purpose, which is to stop the unnecessary hemorrhaging of regulatory capital based on accounting principles that don't fit the circumstances.

Comments (2)

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  1. John Booke says:

    Bob
    What about the “monetary base?” Do you think that it is also driven by depositors taking cash out of their checking accounts? What are these people doing with all this cash? Does it just sit in safe deposit boxes or hide under beds? Does the Fed keep track of how much cash is in circulation?

  2. T-Bone says:

    Yeah, sure there’s confusion regarding physically printing money versus just crediting accounts when the Fed buys assets. But it’s not an important distinction because the idea of creating money is still the same.

    I think the more prominent and significant error people make is that they think government deficit spending is funded by printing money, and they furthermore assume that means inflation via the dilution of currency. The same people also understand the fact that government borrows money when it runs deficits. People hold both these contradictory views (printing and borrowing) at the same time. I suppose if push came to shove, the reasoning they’d give is that government chooses between borrowing or printing as it wishes.

    I think most people don’t even know the money creation role of the Fed, let alone the distinction between physical currency or not. I think they are usually referring to fiscal policy when they talk about printing money, and don’t even know monetary policy exists.