How Absurd – Banks Should Not Lend More than Liquidating Value of an Asset?

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QUESTION: Mr Armstrong, there are those who advocate that banks simply cannot ever lend beyond the liquidation value of its assets and that if the bank is threatened with insolvency then you unwind the loans and you eliminate a banking crisis.

Do you think this is a viable solution?

Thank you


ANSWER: No. That is pretty naive and totally absurd. What is the liquidating value of any asset? During a recession, that may be 60% of the face value. In a depression, that may be 10%. That cannot be standardized and merely reflects sophistry for that person may think they understand banking, but they are really clueless. That is like some guy trying to write a book on how it feels to give birth. If you cannot pre-define with certainty the liquidation value of any asset during a panic, then how is it possible to set some sort of arbitrary value? How absurd!