Economic Emergency Solution – September 30, 2008
How does the general public interpret what it hears in the news about the current economic crisis? How does the general public determine whether or not the current bailout or buyout bill is going to solve the problem in the right way? It’s not possible without an understanding of some of the most basic roots of the problem. Let’s deal with one problem that could be solved today, if the government had the will and no ulterior motives.
“Mark to Market Accounting” (Don’t get bored. This is easy to understand and it affects you directly.)
The Financial Accounting Standards Board Statement No. 157 “Fair Value Measurements”, (FASB 157) which became effective after November 15, 2007.requires banks and lending institutions to re-evaluate the worth of the loans/mortgages based on the constantly changing market price. Therefore, if the market is wildly inflated, then the balance sheets of the banks reflect an inflated asset value. In this case, investors may look at the banks’ balance sheet and buy their stock because it appears to be highly successful. On the other hand, if the market value plunges, so do the asset values of the banks and lending institutions, giving the appearance of a bank or institution that is failing. The underlying asset, let’s say a house in the case of a mortgage loan, is still sitting there unchanged – bricks and mortar, AND the borrowers may still be paying the loans back as agreed, but it’s value on paper has gone up or down and probably back again.
The intention was to try and give a true value of assets at a specific point in time. However, in a volatile market, the banks and institutions end up with volatility on their balance sheets. This can cause and has caused chaos resulting in mergers, acquisitions and closings of these companies. Their investors and depositors, even their customers can loose out.
The next result is that credit is not available. This hurts everyone.
Explanation from Wikipedia: http://en.wikipedia.org/wiki/Mark_to_market
“Example: If an investor owns 100 shares of a stock purchased for $40 per share, and that stock now trades at $60, the “mark-to-market” value of the shares is equal to (100 shares × $60), or $6,000, whereas the book value might (depending on the accounting principles used) only equal $4,000.
Similarly, if the stock falls to $30, the mark-to-market value is $3,000 and the investor has lost $1,000 of the original investment. If the stock was purchased on margin, this might trigger a margin call and the investor would have to come up with an amount sufficient to meet the margin requirements for his account.”
FASB 157 addressed the issue of market volatility this way:
“Emergency Economic Stabilization Act of 2008
Section 132 of the proposed Emergency Economic Stabilization Act of 2008, titled “Authority to Suspend Mark-to-Market Accounting” restates the Securities and Exchange Commission’s authority to suspend the application of FAS 157 if the SEC determines that it is in the public interest and protects investors. Well, where are we now?????
Section 133 of the proposed Act, titled “Study on Mark-to-Market Accounting,” requires the SEC, in consultation with the Federal Reserve Board and the Department of the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.” http://en.wikipedia.org/wiki/Mark_to_market
Why hasn’t this act been excercised in this situation? It would immediatey have stopped the failing of the banks and institutions and allowed time to properly remedy each case. The responsiblity would be that of Securities and Exchange Commission Chairman, Chris Cox, Sec. of Treasury, Hank Paulson, and Federal Reserve Chairman, Ben Bernancke.
Why didn’t this happen? Why don’t we do this now instead of passing a very bad bill strapping the taxpayers with bad debt.
Economics 101: Don’t buy bad debts. Thoroughly research and buy good debt instruments, unless you want to loose money.
This government seems to be determined to buy bad debts rather than suspend the mark-to-market accounting method until things are worked out correctly. Time is needed to place a true valuation on each asset and publish a balance sheet that accurately reflects the assets of the firms. This could stop the bleeding quickly.
Someone please tell us why half of Americans trust Obama with the economy? What is this based on? No education in economics. No experience in economics. Has said nothing of importance on this subject. Was AWOL on the current crisis. Remember, “If they need me they can call me.”????? That was Obama’s initial answer to this emergency. When they called him, what did he do or say? He resisted going to Washington. He wanted to get in front of the cameras and debate to get himself elected. McCain WAS asked by Democrats to come to Washington and tell us what he wants us to do – Harry Reid. The President called McCain and Obama to come to Washington. McCain was already on his way. Obama reluctantly went.
Is anyone suspicious of the timing of this? It’s been said that Obama benefits if the issue is the economy. What happens just a few weeks before the election? The economy is purported to be on life-support – rather suddenly! Bam! Obama pulls ahead, when just days before, McCain was ahead.
ulson drafted a bill giving himself Czar-like powers over our entire economy and sold the President on the urgency of granting it to him. Paulson is from Chicago. So is Obama.
Perhaps there’s no connection, just a coincidence. But I will say that Chicago keeps popping up everywhere there is a good thing for Obama and a bad thing for McCain.
Execute the emergency suspension of mark-to-market today!
CAll your representatives and ask them why this hasn’t been done and if they will call for it. Calling for the removal of Paulson is another idea worth considering.
There is no more time to do nothing.