[eDebate] why does obama refuse to suspend mark to market?
Mon Mar 9 16:30:01 CDT 2009
Your post makes it seem as if every idiot knows that suspending mark to market would solve the financial crises. I'm not so sure its that simple. I definitely disagree that ignorance or a secret bank nationalization agenda are the only reasons not to suspend mark to market. I'm also not sure I agree with your claim that this is a "Bush Policy" although SAFS 157, which I'm pretty sure your post is about, did go into force during W's Presidency,
When you say mark to market "spirals economic downturns" I think that language might be a bit loaded, and "destroys banks" definitely is. I think everyone can agree mark to market is "pro-cyclic", meaning it magnifies changes in asset valuation on both ends of the spectrum. No one generally complains when this drives asset values up. As for spiraling downturns, I think that may ignore attempts to differentiate between healthy and ailing markets as the SEC has done recently:
"Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale."
In fact critics of this opinion letter feel that it already goes too far in allowing companies to ignore the market valuation of assets.
Which brings us to another possible reason besides ignorance or a secret agenda not to suspend mark to market. Proper asset valuation. For example, say my dad has 20 dollars to give his kids for allowance for the week, 10 for me and 10 for my brother. He invests the whole $20 in my lemonade stand, and all the other kids in the neighborhood get 20 from their parents for their own stand. Then, before getting any revenue, all the kids get bored and proceed to abandon everything on the side of the road so it spoils and has to be thrown away. Dad then tries to sell his $20 "share" to another neighbor. They won't buy it. All the parents in the neighborhood try to sell, for pennies on the dollar. Most can't even sell at all. No one is buying. So, marked to the market, the value of their investment is zero. Now my brother wants his $10 allowance. How can my dad pay him the allowance when he squandered it foolishly "investing" in my worthless lemonade stand? I know!!! Let's let him suspend mark to market. That way he can pretend like his investment is still worth (hmm lets make a number up) 10$, just what he owes. Now can he pay? No! Now this little accounting gimmick may improve his net worth by $10, but it didn't give him $10 for my brother?s allowance and it didn't change the fact that all $20 is gone and his investment is completely worthless. Marking to market did accurately value the asset, rather than cover up the problem with a lie.
So, maybe that?s not the best analogy, and maybe the troubled asset values in our economy aren?t exactly zero or even as low as the market suggests, but I hope it makes the point that the real crisis is not due to what fictitious value we do or do not place on an asset, its due to a massive destruction of value that suspending mark to market won?t solve. I'm willing to acknowledge that some suspension or modification of mark to market might be a part of the solution, but I would hardly put it in the no brainer category your post seems to.
P.S. If you are willing to entertain any legitimate reasons for not suspending mark to market, some are discussed in:
Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting OFFICE OF THE CHIEF ACCOUNTANT DIVISION OF CORPORATION FINANCE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Old Strega oldstrega at hotmail.com
Mon Mar 9 10:48:14 CDT 2009
It's a bush 2007 policy that was the major factor in the credit collapse. FDR suspended mark to market in 1938 for the reason that it unnecessarily destroys banks. The bailout will either not work or work slower if mark to market is not suspended.
The question is: why does Obama not change this bush policy?
1) Ignorance. He does not know the history of mark to market and why it spirals economic downturns.
2) Nationalization is the goal. If Obama suspends mark to market, a no cost solution bottoms out the recession.
i thought Obama was going to form a team of rivals and get information from multiple perspectives in the spirit of policy experimentation. Are you telling me no one in his administration has suggested the possibility of suspending mark to market? Are they that miserable and clueless? Or do they have another agenda?
here's Forbes opinion last Friday.
yes, there is now an enormous amount of bad mortgage debt but in the 80s and 90s there was an enormous amount of bad third world debt with no crisis of this magnitude because FDR's suspension of mark to market accounting remained in place. Bush reinstated mark to market in 2007 and Obama is either completely stupid or using the negative effects to accomplish his own ends.
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