The American people want something to be done about the current financial crisis, but most of us don’t want to swallow a $700 billion experimental pill. It seems that President Bush, Secretary Paulson, Congress and both presidential candidates don’t want to do anything that doesn’t involve spending huge sums of taxpayer dollars.
I wish they would start thinking outside the box. For the past few days we’ve heard more and more about “mark to market” accounting. Some argue that suspending the mark to market rule would ease up the credit crunch almost immediately. Surely the Democrats will be against any such measure because they oppose anything that sounds like “deregulation”.
Basically, removing the mark to market rule would allow financial institutions to value their assets at the value those assets would be at maturity. With mark to market accounting, these institutions are required to value the assets at today’s rates. Jim Ainsworth explained it nicely:
Wall Street is essentially driven by emotion and the news of the day, so when nobody wants a particular security, the price falls fast and hard. Do I believe in efficient markets? Yes, eventually, but markets are often wrong for periods of time … think years. Therefore, we are marking assets down to near zero based on markets that fluctuate wildly from minute to minute. The media have hammered us with news about drops in home prices and increases in mortgage delinquencies to the point that nobody wants to own these assets. A few rotten apples have spoiled the whole barrel. Sub-prime loans and the securities they are bundled into have plummeted in value, sometimes to zero, because nobody wants to touch that barrel, even if most of the apples are still good. Banks marked them to their current value, billions in capital disappeared with the stroke of a pen (excuse me, stroke of a key.) Read the full article.
Jim Ainsworth isn’t the only one pushing this idea. Newt Gingrich believes that suspending the mark to market rule would fix 70% of the problem immediately.
Dave Ramsey also has a plan to fix this mess. He provides a link where you can email all of your family and friends. His plan includes suspending mark-to-market on certain assets. It also helps struggling homeowners stay in their homes, which in principle I oppose-why should I pay for someone else’s mistake? But that idea may be palatable to the Democrats. He also calls for elimination of the capital gains tax. There is a link allowing you to email his plan to your representatives.
There is plenty more out there on the subject.
How Mark-to-Market Accounting is Killing the Financial Markets
All of those Democrats shouting about lack of regulation don’t seem to understand that the Fannie/Freddie/CRA boondoggle, combined with regulation is what brought us to this point.
By last report, the SEC is resisting calls for suspending the rule, but said they may issue some “clarifications” on complying with the rule.
