SPAM Re: [USML Announce] Drastic Action, No?

Wed Jan 21 09:36:51 EST 2009

Greetings; 

???? Sorry, bad copying on my part - I didn't mean to bore you with the text portion.? The great headline suffices. 

----- Original Message ----- 
From: rickgam at comcast.net 
To: "USML Announcements" <announce at usml.net> 
Sent: Wednesday, January 21, 2009 9:32:10 AM GMT -06:00 US/Canada Central 
Subject: [USML Announce] Drastic Action, No? 

Greetings; 
???? I don't know what Jeff's brother did to piss off Mssrs. Wesbury and Stein, but aren't they going a bit nuclear?? I mean, demanding Presidential action on a defunct USML team? 
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Mr. President, Suspend Mark-To-Market 
Brian S. Wesbury and Robert Stein , 01.21.09, 12:00 AM EST A priority for Obama's economic team. 

pic

After Citigroup and Bank of America reported more troubles with markdowns last week, the Treasury Department, the Fed, the FDIC and the incoming Obama economic team seem to have coalesced around another idea to save the financial system. 

The new plan (which is only a proposal at this point) would use the second $350 billion tranche of the TARP plan to capitalize a government-owned "aggregator bank" that would buy up "bad" assets that continue to undermine bank capital. 

There is an easier way to deal with this problem. A bold move by the new president, Barack Obama , to support a suspension of mark-to-market accounting would stop the deterioration in bank balance sheets and allow time to heal without taking down the entire economy in the process. 

What many people do not realize is that mark-to-market accounting existed in the Great Depression and, according to Milton Friedman , was an important reason behind many bank failures . In 1938, Franklin Delano Roosevelt called on a commission to study the problem and the rule was finally suspended. Rather than waiting eight years as we did in the 1930s, the new president could fix this problem immediately. 

Last week in London, Federal Reserve Chairman Ben Bernanke said, "the presence of these [toxic] assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new and private investment and new lending." 

To paraphrase: As long as these assets have the potential to be marked down, bank capital is at risk. And as long as bank capital is at risk, private investors will remain skeptical and banks will remain conservative, which impinges their willingness to lend. 

If we look back, every plan the government has proposed or implemented is designed to address this problem. Every plan used taxpayer dollars to fill holes in bank balance sheets or to keep write-downs from further eroding capital. 
Comment On This Story 

Unfortunately, the government's interference has often made problems worse. Plans and strategies have changed multiple times. President Bush's Sept. 24, 2008, speech on national television to call on Congress to pass the bailout plan, scared people. Investors have been forced to take hair cuts and so much government capital is sloshing around, actual market prices are suspect at this point. And the biggest mistake of all is that mark-to-market accounting rules have not yet been suspended. 

Compare this to the 1980s, when, according to William Isaac (chairman of the FDIC between 1981-1985), every money center bank would have been bankrupt if forced to write down the value of Latin American debt to 10 cents on the dollar (where it was trading). At that time, the U.S. government did not buy up all the debt. Instead, it allowed banks to keep the debt on their balance sheets at or near par. 

Short-sellers, and others who oppose the suspension of mark-to-market accounting, argue that the prices in the market today are the correct price and that banks should be forced to recognize them. However, Sheila Bair, current chairman of the FDIC, recently said, "we don't have really any rational pricing right now for some of these asset categories." So why should banks be forced to mark these assets to market? And what price should the government actually pay for them? 

The government knows mark-to-market accounting is a problem. Ben Bernanke and Treasury Secretary Hank Paulson realize that it is most likely pro-cyclical--encouraging banks to lend more in the good times and less in the bad times. But instead of suspending--temporarily, and just for certain assets--mark-to-market accounting, the government continues to spend hundreds of billions of taxpayer dollars on ideas that have not yet fully shored up bank balance sheets. 

So, if mark-to-market accounting remains off limits, the new president might want to support a plan (first laid out in our Sept. 23, 2008 piece, "Financial Socialism? No Thanks." ) that would put a decentralized TARP in place. 

Rather than having the government buy all of the bad assets and hold them in a Big Bad Bank, why not allow individual banks that already hold these assets to sequester them and have the federal government provide insurance? This would quarantine the system from further markdowns. 

Bad loans will still be bad loans, but the erosion in capital accounts from markdowns would be halted. This is the only real way to stop the vicious cycle of mark-to-market accounting without having the government spend even more hard-earned taxpayer dollars. 

Brian S. Wesbury is chief economist, and Robert Stein senior economist, at First Trust Advisors in Lisle, Ill. They write a weekly column for Forbes.com. 

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***SPAM*** Re: [USML Announce] Drastic Action, No?

SPAM Re: [USML Announce] Drastic Action, No?