Asset Value Variation in Minsky (Marked to MArket Losses

[Michael Bridges]

If I create a loan asset account and a corresponding deposit liability account in a single Godley Table, is there a way to show how the Asset account can decrease due to say the loan value decreasing in the secondary market?

I think this breaks from the standard treatment seen in Steve's papers where the only way the asset value can can decrease is if there is a reduction in the corresponding liability deposit account (i.e. loan repayment).

I would like to explore concepts like marked to market losses and loan default in Minsky and was wondering if there was something behind the scenes that would prevent me from doing this.

[High Performance Coder]

On Mon, Jan 06, 2014 at 08:54:08PM +0000, Michael Bridges wrote:

If I create a loan asset account and a corresponding deposit liability account in a single Godley Table, is there a way to show how the Asset account can decrease due to say the loan value decreasing in the secondary market?

I think this breaks from the standard treatment seen in Steve's papers where the only way the asset value can can decrease is if there is a reduction in the corresponding liability deposit account (i.e. loan repayment).

I would like to explore concepts like marked to market losses and loan default in Minsky and was wondering if there was something behind the scenes that would prevent me from doing this.

Unfortunately, this is getting a bit outside my area of expertise
:). IIRC, the system will not allow you to have two columns with the
same name in a Godley table.

--

---

Prof Russell Standish Phone 0425 253119 (mobile)
Principal, High Performance Coders
Visiting Professor of Mathematics hpcoder@hpcoders.com.au
University of New South Wales http://www.hpcoders.com.au

---

[Michael Bridges]

You wrote:

Unfortunately, this is getting a bit outside my area of expertise
:). IIRC, the system will not allow you to have two columns with the
same name in a Godley table.

I understand and thank you. After thinking about it some more I think I answered my own question. The bottom line is that row sums are not forced to zero and the simulation will still run. Actually, my hypothetical did not have duplicate account names although my use of the word "corresponding" may have confused the matter. I was just wondering if I could have an extra flow (marked to market loss yet to be defined) out of the loan account that was not matched by an equal flow out of the deposit account. I think I can but it would not be the way Steve has done things in the past as he like to have row sums equal zero.

I am wondering if Steve or an others could comment?

When thinking about what the yet to be defined marked to market loss flow would look like I would guess it would be some nonlinear algebraic function of the system states. The model would have to have additional tables representing individuals and firms whose equity is continuous calculated as a function of those tables' state variables.

It would then seem reasonable to have the marked to market loss flow increase in a nonlinear fashion the closer to zero, equity values for firms and individuals got.

Any thoughts from others out there?

By the way, it seems this particular thread is straying from discussions about Minsky and moving more to the theoretical economic modeling details that are outside the expertise of Prof. Standish.

Is there a more appropriate place to discuss such theoretical concepts?

[Graham Hodgson]

In accountancy, the accounts for assets whose values decline due to
mark-to-market are written down by simultaneously posting a loss to the P/L
account. This reduces equity on the balance sheet to balance the reduction
in assets.

--
Regards

Graham Hodgson

Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo

Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/

On 7 January 2014 00:00, Michael Bridges mmbridges@users.sf.net wrote:

You wrote:

Unfortunately, this is getting a bit outside my area of expertise
:). IIRC, the system will not allow you to have two columns with the
same name in a Godley table.

I understand and thank you. After thinking about it some more I think I
answered my own question. The bottom line is that row sums are not forced
to zero and the simulation will still run. Actually, my hypothetical did
not have duplicate account names although my use of the word
"corresponding" may have confused the matter. I was just wondering if I
could have an extra flow (marked to market loss yet to be defined) out of
the loan account that was not matched by an equal flow out of the deposit
account. I think I can but it would not be the way Steve has done things in
the past as he like to have row sums equal zero.

I am wondering if Steve or an others could comment?

When thinking about what the yet to be defined marked to market loss flow
would look like I would guess it would be some nonlinear algebraic function
of the system states. The model would have to have additional tables
representing individuals and firms whose equity is continuous calculated as
a function of those tables' state variables.

It would then seem reasonable to have the marked to market loss flow
increase in a nonlinear fashion the closer to zero, equity values for firms
and individuals got.

Any thoughts from others out there?

By the way, it seems this particular thread is straying from discussions
about Minsky and moving more to the theoretical economic modeling details
that are outside the expertise of Prof. Standish.

Is there a more appropriate place to discuss such theoretical concepts?

Asset Value Variation in Minsky (Marked to MArket Losseshttps://sourceforge.net/p/minsky/discussion/general/thread/7fcef85f/?limit=25#c4c4

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[Michael Bridges]

Thanks for your comments Graham.

You wrote:

In accountancy, the accounts for assets whose values decline due to
mark-to-market are written down by simultaneously posting a loss to the P/L
account. This reduces equity on the balance sheet to balance the reduction
in assets.

By the way nothing I am about to say contradicts anything you wrote. I'm just pointing out another way of looking at Steve's dynamic models and Accounting double entry book-keeping rules in a unified framework of state space dynamic system theory.

So based on what you said, the discussion of state variables/stocks in an adjacent thread and the language of state space dynamic system modeling, I believe the following:

The P/L account is an output variable that can be written as an algebraic function of state variables (independent stock accounts). In other posts on Steve's website I have mentioned that I thought that accounting balance sheets are just the description of the output equation in a state space dynamic system representation. I would add that it also can be said that it also defines constraints when describing systems as algebraic differential equations as opposed to ordinary differential equations. Accounting seems to be static and Steve's economic models are dynamic. Steve, in forming the right hand side of his ODE's, relies upon double entry bookkeeping accounting constraints.

It should be pointed out that accounting rules still don't provide all that is needed. He must also add to the right hand side of his dynamic equations, assumptions on how the flows change as a function of other stock variables and time.

So I am still interested in seeing how one might construct dynamic models of asset value variation. I think Steve put something like this in some of his earlier papers using a Goodwin model. I don't understand it yet but it seems to me to describe some of the dynamics associated with a labor market. I'm wondering if such an approach could be modified to describe the dynamics of say a mortgage asset backed security market. This would, for example, provide the equations for how an aggregate asset account might deflate or inflate other than by debt repayment.

Any thoughts?

[Graham Hodgson]

Thanks for this. Since my January post I have been reading the Godley and
Lavoie textbook and realised that this modelling approach is based on the
economics system of national accounts, rather than the accounting system of
double entry bookkeeping. There are subtle differences surrounding the
treatment of liabilities in general and the P/L account in particular. From
an accounting perspective, assets are transferable: they flow and
circulate, but liabilities are not: they wax and wane. This causes
particular problems when linking Godley tables to model the transfer of
assets which are liabilities of third parties such as bank deposits using
double-entry bookkeeping thinking.

Further, accountancy looks only at the static position of the accountable
entity so liabilities are valued on a going concern basis in historic
nominal terms and are independent of the current market value of the
corresponding assets. This creates a discrepancy in system-wide valuations.
The economics/SNA approach gets round this by, in effect, valuing entities
on a break-up basis, not a going concern basis, so when the holder of a
financial asset reports a rise in its market value the issuer of that asset
reports a corresponding rise in its liabilities to reflect the fact that if
it were to retire its liabilities prematurely it would need to buy them
back at current market prices, rather than at maturity value.

My current thoughts are that the two approaches could be reconciled by
interposing a third entity, namely the market, between the issuer of
transferable liabilities and its corresponding creditors. The market's
assets would be equivalent to the liabilities of issuing entities valued on
a going-concern basis (ie, at historic nominal cost), and its liabilities
would be equivalent to the corresponding securities issued valued on a
mark-to-market basis.

That, I'm afraid, is as far as my own knowledge currently takes me, as I
struggle with the transition from difference equations to ODEs and a glance
at Wikipedia confirms that algebraic differential equations are foreign
territory

--
Regards

Graham Hodgson

Phone: 0207 253 3235
Office Address: http://bit.ly/rs6iQo

Please take three minutes to find out why there's so much debt and what we
can do about it: http://www.positivemoney.org.uk/

On 26 March 2014 01:10, Michael Bridges mmbridges@users.sf.net wrote:

Thanks for your comments Graham.

You wrote:

In accountancy, the accounts for assets whose values decline due to
mark-to-market are written down by simultaneously posting a loss to the P/L
account. This reduces equity on the balance sheet to balance the reduction
in assets.

By the way nothing I am about to say contradicts anything you wrote. I'm
just pointing out another way of looking at Steve's dynamic models and
Accounting double entry book-keeping rules in a unified framework of state
space dynamic system theory.

So based on what you said, the discussion of state variables/stocks in an
adjacent thread and the language of state space dynamic system modeling, I
believe the following:

The P/L account is an output variable that can be written as an algebraic
function of state variables (independent stock accounts). In other posts on
Steve's website I have mentioned that I thought that accounting balance
sheets are just the description of the output equation in a state space
dynamic system representation. I would add that it also can be said that it
also defines constraints when describing systems as algebraic differential
equations as opposed to ordinary differential equations. Accounting seems
to be static and Steve's economic models are dynamic. Steve, in forming the
right hand side of is ODE's, relies upon double entry bookkeeping
accounting constraints.

It should be pointed out that accounting rules still don't provide
everything. He must also add to the right hand side of his dynamic
equations, assumptions on how the flows change as a function of other stock
variables and time.

So I am still interested in seeing how one might construct dynamic models
of asset value variation. I think Steve put something like this in some of
his earlier papers using a Goodwin model. I don't understand it yet but it
seems to me to describe some of the dynamics associated with a labor
market. I'm wondering if such an approach could be modified to describe the
dynamics of say a mortgage asset backed security market. This would, for
example, provide the equations for how an aggregate asset account might
deflate or inflate other than by debt repayment.

Any thoughts?

Asset Value Variation in Minsky (Marked to MArket Losseshttps://sourceforge.net/p/minsky/discussion/general/thread/7fcef85f/?limit=25#c4c4/b486/6d1b

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