Iain Murray has some alternatives to the Democrats spending plans:
Any “stimulus” bill that doesn’t include relief from the provisions of the National Environmental Protection Act…isn’t going to get any infrastructure project going any time soon.
So if you want to stimulate, you’re going to have to liberate. Similar arguments can be made as regards Davis-Bacon and 13C. There are a bunch of other such ideas, which will also get the economy moving by getting government out of the way. For example, finally suspending mark-to-market accounting properly, which will be a huge boon to the banks. Or getting rid of the burdens of SarbOx and other ridiculous and ineffectual regulations on small businesses. Antitrust reform would help, too. And you could even think about finally getting rid of the Corporate Income Tax, a hold-over from the days when income tax itself was unconstitutional, and which, at least before the 2005 reforms, probably cost more to collect than it raised in income.
Somehow, I suspect that this will not be the preferred Democrat approach.
For example, finally suspending mark-to-market accounting properly,
Why does this canard keep appearing? As I see it, there’s absolutely no problem with accounting right now. Mark-to-market is as good a valuation scheme as you can get. The real problem however is what actions you are forced to take when your assets devalue suddenly. This could be done in a simpler and more transparent way by lowering reserve requirements and suspending some of the mandatory actions.
I’m siding against SarbOx now. At the time it came out, it sounded to me like a good idea. But I gather it just makes a murky minefield for CEOs to tread (and the crooks still do their usual activities), and it gives the wrong impression to the investor who isn’t really protected from anything.
Finally, eliminating the corporate income tax would be a good move. There’s already a number of companies that don’t pay corporate taxes (common trick, expensing stock options, which I gather still works). Just get rid of the tax so the accounting is simplified.
Karl,
Requiring “Mark to Market” when there are no buyers on the market causes prices to be marked as $0; this can cause a bank to go bankrupt even when it’s cash-flow positive.
Say a bank holds a structured product made up of of 30-year ARM mortgages; should said bank record them on the books at face value, current market value, or some other measure? When you use current market value in the absence of buyers the market price is $0 even if the portfolio is still paying 90% of its premiums on time. This is causing many banks many problems. It’s also of questionable rationality.
Requiring “Mark to Market” when there are no buyers on the market causes prices to be marked as $0; this can cause a bank to go bankrupt even when it’s cash-flow positive.
If there is a genuine absence of buyers, then there’s no market and you go with a backup method for estimating the value of the asset. Having said that, I don’t think a broken market is the real problem with bank assets these days. I think there really has been a substantial decline in the value of bank portfolios.
Say a bank holds a structured product made up of of 30-year ARM mortgages; should said bank record them on the books at face value, current market value, or some other measure? When you use current market value in the absence of buyers the market price is $0 even if the portfolio is still paying 90% of its premiums on time.
As I mention above, this doesn’t look like the problem to me. The problem is that the securities have genuinely dropped in value by a considerable amount. The absence of buyers is merely the absence of buyers at the current price for the security. Once you lower the selling price enough, you will get enough buyers. If the portfolio is paying 90% of its premiums on time, the price will not be $0.
As I see it, this scenario, where the assets of the bank have declined substantially on the market is a good case for entering bankruptcy court. Coming up with some fantasy valuation for the assets of the bank in order to prolong the life of the business doesn’t make sense to me. That’s the type of thinking that leads to larger failures down the road as weaknesses are repeatedly patched up until they grow too big for the business to continue to function.
The absence of buyers is merely the absence of buyers at the current price for the security.
In a theoretical world with infinite rational market participants who have perfect forecasting ability you’d be right. But we don’t live in that world. We live in a world of uncertainty where the government fucks things up.
If the portfolio is paying 90% of its premiums on time, the price will not be $0.
But it IS zero. That’s the market price. Well, not actually zero, but it’s priced at much less than cash flow because of uncertainty about the future. But that’s a prediction; it could be wrong. What we know today is that Mark to Market is closing funds and banks that have positive cash flow because of the -fear- that continued foreclosures are inevitable. It’s fear that’s driving them out of business, nothing else. Fear put on the books by an accounting rule.
The real problem with mark-to-market in the home loan case is that uncertainty has driven the prices to zero. We had agencies (that everyone trusted) saying X, Y, and Z are all good credit risks. Then it turns out that X was a terrible risk – and everyone in the agencies were arrested for fraud. What price does a buyer post for Y and Z then?
They have no way to know what the value is – so they stay out of the market, and make no offers. The only offers left are a penny on the dollar or less (no risk offers for the buyer, because they are offering no money). No one takes those offers, because of course the seller knows that the assets are higher value.
But those low ball offers that no one takes have set the “market value” of the items. So now the banks have to carry them on there books as 0 value, even though they are worth quite a bit. This wouldn’t be a problem in a normal company – the profits will still be realized, after all – but banks are only allowed to loan a certain portion of their assets. So now they can loan less – and the world goes into a recession.
That said, banks not giving loans is not the driver for recession anymore – no one wants loans. Do you want to take on debt right now? Neither does anyone else – and that includes most companies. All the business owners I know of paying down debt as fast as possible right now – and cutting costs to the bone, of course.
I don’t know if there is a backup method of evaluating the value of your assets, Karl. It’s all based on the market, of course, ultimately, in one way or another, because there is no rational definition of the value of an asset that isn’t founded at some level on what someone else is willing to pay for it.
So what do you do when it seems consumers and business throughout the US have more or less just decided to stop buying things for a while?
It’s been a very long time since this happened. For most of the previous century, the problem has been (perceived) to be one of credit. If the price of borrowed money is low enough, then someone will always buy an asset at the price its present owner paid for it, or more. Hence the Fed has restarted economic slowdowns by cutting the price of credit.
But now the price is zero, or even less, and still no one’s buying. It looks very much like people fear real deflation. That is, that there is no market at all for certain assets (e.g. houses) at the price last paid for them. That major classes of asset-holders (e.g. homeowners) must take a serious loss in order for business to restart.
Naturally, everyone’s waiting on that. There’s a no, you first attitude at work. Whoever takes the plunge and sells at a big loss first is going to take the biggest loss (the thinking goes), because after trade picks up prices will rise again with investor confidence, and subsequent sellers will not take as big a loss or even make a profit.
What some people fear is that this will turn into an inverse bubble, where people refuse to sell for too long — and then suddenly the non-selling “bubble” pops with a sudden rush of selling, in which prices continue to fall, and later sellers take bigger losses. This is a recipe for a deflationary spiral, a la the Great Depression.
The government is wrestling the problem of how to get people to sell at a loss. The preferred solution seems to have been to have government buy at their preferred price, and then have the government sell at a loss. But the taxpayers don’t like that, because they’re left with the bill.
The bottom line is that many assets are presently overvalued, and their price must come down, relative to the price of labor. It can happen abruptly and painfully, with awful overshoot, or it can — theoretically — happen gradually, with widespread but modest pain. Problem is, no one yet knows how to achieve the latter. So we wait and see if it magically happens by itself, while shitheads in Congress use the anxiety to install their favorite programs, feather their own beds, and otherwise meddle in their usual dumfuk way.
I’ve always resisted buying collectables such as comic books or bubble gum cards because I believe that something is really worth only what someone else is willing to pay for it. I once heard it explained as the “bigger fool than you” theory, where you buy something (collectable, real estate, stocks) and hope that some day an even bigger fool than you will pay more for it.
In the case of collectables, I’ve often thought the situation is like a game of musical chairs. Sooner or later, the bubble will burst and someone who paid top dollar for something will be left holding something that no one wants to buy. How would you like to be the one left holding a Beanie Baby that you paid $50 or more for when the value drops to near zero?
The same thing can happen to stocks – sometimes the price drops to zero. That doesn’t happen to real estate but the value can easily drop to less than what you paid for it. All it takes is for some really adverse situation to greatly increase the supply of houses on the market in an area with low demand. I’ve seen it before and it’s happening again in many places. My wife and I bought our first home in 1986. A little over a year later, the local housing market practically collapsed. The value of our home was soon over $10K less than we owed on it. Fortunately, we were able to ride it out. The market turned around in 1992 and we sold it for a profit in 1993. Luckily, we didn’t see our home as an ATM machine and we didn’t have to move in the meantime.
Letting the price of homes fall to market level is very painful for a lot of people but it also opens up housing to people who were priced out of the market. Government intervention to artifically inflate the value of houses will likely only serve to prolong the problem.
I don’t see that Karl is arguing that mark-to-market accounting is perfect or even good, just that it’s not the cause of the problems. The real problem here is that we don’t know what the right approach is, but we have to use something. Didn’t we move to mark-to-market to correct the opposite problem, of the Savings and Loans drastically overvaluing their loans?
If there were an algorithmically based method of determining value that we knew to be correct, then the market price would reflect that, because people would rush to buy until prices rose to their ‘correct’ value. But, there isn’t one. No one knows. *That’s* the fundamental problem, not the mark to market accounting rules.
Personally, I’d like a way for non regulated, non insured banks to be founded – then we wouldn’t have to argue about the accounting rules. However, that appears to have been what the investment banks and money markets were, and we couldn’t resist retroactively insuring them. Apparently, I might as well wish for a pony.
I think I need to clear the air a bit. For starters, I’m not convinced that mark-to-market is in error even now. But that isn’t really the point. David brings up a crucial point. We don’t have a good value for these assets now. There’s no magic formula that’s going to tell us what these things are worth. Note that I use the term “estimating” when I speak of non-market valuation. A better term is “guessing” or even WAG.
But valuation isn’t the real problem. A lot of the schemes proposed (like the abominable one that Gingrich proposed, averaging the value of the asset over something like five years) serve merely to artificially increase the value of the assets as they appear on the ledger. Why are they inclined to use these numbers? It’s clear that these assets have dropped considerably in value. Why pretend they’re higher than they actually are? Especially when that valuation method is going to linger years or decades past the short time it was desired?
As I understand it, the real problem is that when assets drop considerably in value, businesses, especially banks and companies holding substantial securities investments are required to act to cover those losses and to prevent further losses. For example, the banks are required to maintain a reserve. Companies that hold uncovered stock options or investments on margin are required to cover their exposed investments.
So there are three options that are far more effective than inventing yet more ways to fudge asset valuation: 1) Let the company go into bankruptcy, 2) temporarily suspend the obligation that requires the company to make poor investment choices in a bad economic market, and 3) If there really is a case of assets being greatly undervalued, then there is a business opportunity for the US government to step in and buy those assets.
On the last point, it is worth pointing out that the government really is the insurer of last resort. If things are that bad that you’re looking at shutting down potentially viable companies (or even whole sectors) because no one will or can afford to touch their assets, then maybe it’s better to buy assets and keep the markets liquid.
I need to stop typing while tired. I have way too many points in my last post.
> If there is a genuine absence of buyers, then there’s no market and you go with a backup method for estimating the value of the asset. Having said that, I don’t think a broken market is the real problem with bank assets these days. I think there really has been a substantial decline in the value of bank portfolios.
That’s nice, but the mark-to-market rule says that it applies, not some undefined magic backup rule.
Yes, the value of the bank portfolios has taken a huge (and unknown) hit. It doesn’t follow that they should have been liquidated. They were meeting their obligations and it’s not clear that they wouldn’t have continued to do so. (Lehmans got caught in a squeeze when some folks realized that they could force a bankruptcy and pick up some cheap assets. Those folks have sharp elbows.)
The purpose of a reserve requirement is to avoid bank runs. However, bank runs do not necessarily happen when reserves drop below a certain level, especially if “reserve” is defined inappropriately (which it is). And, reserve requirements have costs of their own.
Even if you believe that we need something to avoid bank runs, that doesn’t imply that reserve requirements, let alone the ones that we have, are appropriate tools.
I think you’re right, Karl. The real problem is the inflexible structure government regulation has imposed on investment firms, which force them to do strange and unnatural things when this theoretical value drops below some other theoretical value.
The problem is no one’s going to revisit that mechanism, not in this Longing For Caesar To Solve Everything climate. No one is going to suggest that folks who invested with Lehman just take their chances, and the government isn’t going to guarantee anything. So, we’re left with various schemes to fiddle with the underlying numbers, to achieve what we want (less insane action forced by the law) without actually changing the law.
Schemes to artificially inflate the values are just ways to prod people, particularly gullible people, into taking the financial hit that comes with buying them. Somebody’s got to take it. Nobody in current power wants it to be the investment bankers themselves. They’re all big Democratic Party donors, friends with Senators and such. So far, the preference has been for gullible investors to take the hit — but they’re not stepping up to the plate, alas — so the second choice has been for taxpayers to absorb the loss.
Unfortunately, the taxpayers seem a little wiser than the Democratic Leadership had expected. But just wait, they’ll get a “stimulus” package passed, with lots of razzle-dazzle in it — hey! a tax break for buying a new car! — and buried in there will be the bill for offloading onto taxpayers the burden of all kinds of recent financial mistakes by Democratic Party constituents, e.g. money to bail out California from having to fire all the SIEU employees they hired in the last five years.
I think the philosophy here is, if the small con doesn’t work, go for the Big Con with the bright blinking lights. I bet it works.