If the bank has a loan on the books valued at par, and offer major reductions, should write down the value of the loan. It takes a hit on the capital position, and experience an event of nonperformance by which even the most sympathetic regulators will have no option but tabulation. If the bank has purchased the loan at a discount, however, loans in the books at historical cost. Banks can offer a reduction in principal to the discount rate without experiencing any loss of equity book.

Of course this is a mere accounting problem. Whether or not the banks take a hit of capital has no bearing on whether the main decline will increase the realizable value of cash flow loans.

But accounting is destiny. The economic value of a bank’s franchise, both shareholders and managers, tightly wound with a accounting position. A bank whose books are healthy can distribute cash to shareholders and managers, while a bank whose capital position has deteriorated will find itself constrained. A well-capitalized banks are free to take a lucrative, new speculative business, while the troubled bank should remain dull and unprofitable vanilla.

This is, basically, chaos-through approach to troubled assets. If you keep them on your books at par, then you can claim to be well capitalized, and using all the capital to pay themselves well and expanding into new businesses. Eventually, with luck, the business will be successful enough that they make enough money to cover losses on the assets when they finally realized.

BofA is juggling a mortgage problem as the economy and housing again looked shaky. The market has already shown what they think: BofA shares trade about 50% of book value and about 85% of the stated tangible book value. This means that investors think its assets are either exaggerated or understated liabilities.

In other words, there are two different ways of looking at the bank’s equity. One is the way Waldman, where you take the assets of state banks, reduce liability, and the remaining equity. And then there is a more common and important of doing things, only to see the stock price. It is true that the regulators do not worry about the equity accounting, they pay attention to the stock price as well. (That is one reason that they are not worried about the banks during the subprime bubble: the stock shows very little risk there.) And when it comes to paying employees and open up new business lines, healthy stock prices in a far more useful than accounting fiction.

Investors know how many subprime junk buried in the balance of the largest banks in America, and they take that into account when they value the stock of banks’. If the banks, through a reduction in principal, can increase the real value of that rubbish, Wall Street will likely be their reward rather than punish them. Even if it means taking a write-down on assets that everyone knows is worth significantly less than 100 cents on the dollar.

People who saw the National Income and Product Accounts know that corporate profits are at record high part of national income. And in corporate profits, the financial sector at a record high. Given that we have 25 million people are unemployed, underemployed or who have given up looking for work altogether, which does not seem like a lot of togetherness.

Friedman gives regular lectures about the people in overconsuming United States. The problem in this story is that people will not overconsuming if the housing bubble is real wealth. At its peak, the housing bubble created more than $ 8 trillion in housing equity compared to the situation where house prices have just followed their long-term trend. Consumed by people on the basis of wealth, just as economic theory predicted.

This will be a completely rational decision if they are able to maintain their equity bubble, but of course they do not. The problem is not that people are a waste, the problem is that the people responsible for running the economy allowed the bubble to grow to $ 8000000000000 alleged to have catastrophic consequences.

Blame here lies not with the average homeowner, who acted rationally to the information available. The fault lies in the successful economies, such as Alan Greenspan, Ben Bernanke and Hank Paulson, and people who argue about the economic issues in major news outlets. If these people are competent, they have to shoot bubbles with everything they have before it reaches dangerous levels.

Friedman also turned into a Harvard economist Ken Rogoff advice to accelerate recovery. For some reason he missed one of his favorites. Rogoff suggests that the Fed deliberately running a high inflation rate (ie 6 per cent) for several years. This would have the effect of reducing the real value of debt, making it possible for them to spend more money.