Monday, November 10, 2008

Relax the Mark to Marketing Accounting Rule: Speaking for Galbraith III

The real source of the problem with mark-to-marketing accounting rules has been international, coming out of the Basel II rules that have only recently been fully adopted in the world's banks. In any case, banks must revalue their assets according to current market conditions, which in itself is not such a bad thing. However, the minimum capitalization rules in conjunction with this method of accounting aggravate downward spirals. If a bank's assets decline in value, it may be forced to sell some to raise its capitalization, which has a clearly negative multiplier effect on the markets in general.

The SEC has reportedly been considering some variation of this rule. I would suport a change that has been reported to have been adopted in Germany. Banks that declare a willingness to hold onto an asset to maturity, may value it at its original face value. Thus, promises to hold certain assets to maturity takes them out of being subject to the mark to marketing rule and stabilizes their capitalization, and hopefully, the financial markets more broadly.


Ken Houghton said...

The first problem with that is that John McCain promised to hold his first wife to maturity, too.

He just meant hers, not his.

The second problem is that the sucker may not mature in the manner to which it has been priced. Depends on how many HFS assets suddenly are designated HTM.

It's not a bad short-term solution, so long as it doesn't run into the TX S&L problem (the land is valuable because it has oil under it, so we'll loan you that value—what do you mean there was no oil? Then it's a worthless piece of dirt in the middle of nowhere...).

TheTrucker said...

The best solution is an inflation via demand side stimulus (includes infrastructure development) and the resulting devaluation of the dollar. The Bailout (partial nationalization) of the financial industry and the automotive industry are also keys to the recovery of real estate prices. We are fighting an horrendous deflation and it is not a pretty sight. We need to counter that with all the things that can cause an INFLATION.

It's only money. The houses are all still right where they were; they have not been blown away like in the "Dust Bowl"; and the auto plants and the banks are also in place. If the dollar is worth less then the book value of the homes and the auto factories will come much closer to market value. It's only money.

We seem to have a "money problem", yet money is created by the central banks and is tied to absolutely nothing real. The Fed just created $150B and gave it to AIG, no strings.

We owe the Asians money, not _real_ assets.

We have a problem with oil, but we already know that. That is the reality. We are on the oil standard and we need to get off it. We do that with biofuels, flex fuel cars, and hybrid cars. We do it by developing our _UNUSED_ land in the west were the sun lives and the people and the corn don't. We do it with windmills and HVDC power grids that move the energy to the places where it is needed.

We also do it in a trade deal with Mexico that sees the development of algae farms and ethanol and biodiesel production from the land surrounding the Sea of Cortes (seawater and lots of sun and it doesn't freeze and the storms are moderated by the Baja).

Why would unemployment be a problem? We have lots of work to do. Our only problem seems to be that the people who control all the money (credit) are clogging up the world and holding up progress. They bet on an unlimited supply of oil. They lost.

Anonymous said...

I don't think it makes much difference whether the system is "mark to market" or some other funky idea, as long as it is consistently applied with full disclosure.

At the highest levels, where the big investors roam, the account managers are all aware of how the rules work, and price it into their purchasing.

With full disclosure of the underlying assets, the fund managers have a better idea of what the institution is worth on the market.

Changing the rules every time someone gets their panties in a wad just creates a problem where none may have existed before.

Unknown said...

I will definitely use these materials for writing Accounting papers in college. Thanks.

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