As Krugman says, we’re a banana republic with nukes. This bailout bill gets goofier by the day.
You know my feelings on it. We’re all in this lifeboat called the economy. The thing has been holed. It doesn’t matter now whose fault it is or that they should be killed. Time enough for that if we reach land. The only thing to do right now is bail out the boat before we all sink. We should bail as intelligently as possible — and good for Dodd, Frank, and Clinton!, for trying to do it. But right now, use those buckets.
I’m not surprised when people, who aren’t too clear on how bad this thing can get, think the most important thing is to figure out how to steer the boat. It was . . . three years ago, or will be a few months from now. But what makes my jaw hit the floor is people in the thick of the action who see this as just another way to make a killing.
Mark Thoma has a post about Should Mark-to-Market Asset Valuation be Suspended? Stay with me here. It’s a lot less boring than it sounds. If you price your assets according to what the market says they cost, then when the market’s booming, you’re rich. That $100K house is a $500K house. That bank’s assets are a $100 billion and and it can make loans and earn interest like crazy. Let the good times roll.
But marking to market when the bear is running loose is a different matter. All you have is a $50K house, even if the building materials alone would sell for $75K. The bank’s assets are suddenly a mere $10 billion, which makes it undercapitalized by FDIC regulations, and that means the bank can be closed down. There’s no expression for “let the bad times roll.” Now it’s “Something must be done!”
And guess what they’ve come up with? Suspend marking assets to market. Mark them according to their “fundamental value.” That’s not a bad idea. It’s what they should have done all along: marked them to fundamental value as determined by independent appraisal. It’s the only possible . . . oh, wait, Thoma has more on what’s planned for the new, improved bailout bill–
From the SEC’s “Clarifications on Fair Value Accounting,” released Sept. 30:
Can management’s internal assumptions (e.g., expected cash flows) be used to measure fair value when relevant market evidence does not exist?
Yes. When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable.
Internal assumptions! Never mind what the market says, we’ll just trust you to figure it out for yourselves, boys, because we know you would have no reason to lie about something as immaterial as the state of your own finances!
My jaw is still on the floor. Is there an oral surgeon in the house?
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