Tuesday, April 7, 2009

Soros Says Banks Are "Basically Insolvent"

George Soros tells Reuters that the banking system is 'basically insolvent."

It is important that we understand the difference between liquidity and solvency in order to comprehend the full value of what Mr. Soros is talking about here.

Let's use the noble Investopedia for both definitions

Liquidity is "the degree to which an asset or security can be bought or sold in the market without affecting the asset's price."

Solvency is "the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth."

So when Krugman says that this is not a crisis of liquidity, but instead a crisis of solvency, what is he referring to here? Liquidity is about being able to sell your assets (mortgage notes). Solvency is about maintaining a steady flow of income (homeowners paying on their mortgages). Why aren't the banks able to get homeowners to pay on their mortgages? Wouldn't have anything to do with the fact that that they didn't have WAGES enough to pay, would it?

When Soros says that the banks are "basically insolvent," he's simply saying that the revenue stream has dried up.

Where's the revenue?

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