I have been reading books about the Great Depression recently including New Deal or Raw Deal? by Burton Folsom, Jr. and The Forgotten Man by Amith Schlaes. This current situation looks a lot like deja vu to me. It is really frightening.

Jack Harry

mls

Thank you for your continuous level headed reporting.

I am writing you to ask if you or anyone reading knows the origin of mark-to-market accounting (FAS 157). Who was behind its re-emergence and why… A good topic for further research and reporting… A seemingly good idea with dire unintended consequences.

This accounting rule had its revived inception in 2007 and in my opinion it was a prime catalyst which caused the collapse of financial institutions in 2008.

Remarkably, in November 2007, CFO magazine stated quoting a Bloomberg report:

Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, Goldman Sachs has 185 percent, Lehman Brothers has 159 percent and Citigroup has 105 percent, according to Bloomberg.
In the fair value hierarchy, Level 1 is simple mark-to-market, whereby an asset’s value is based on an actual price. Level 2, known as mark-to-model and used when there aren\’t any quoted prices available, is an estimate based on observable inputs, Bloomberg explains.
Level 3 consists of unobservable inputs, such as those that reflect the reporting entity’s own assumptions about what market participants would use to price the asset or liability (including risk), developed using the best information available without undue cost and effort, according to FASB. There is no verification requirement if the assumptions are in line with those of market participants.

From another article on THIS WEBSITE (Foundation for Economic Education publisher of Freeman magazine):

“Franklin Roosevelt suspended it (mark to market) in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened…”
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.

Clearly, FAS 157 did not “cause” the current economic state alone, however it was the tipping point of the banking collapse due to bank decapitalization. This in turn brought about the subsequent spiraling downturn in the economy due to a ruined credit market. It was one of the factors in an economic “perfect storm”. Bad loans (based on relaxed govt standards and manipulated credit ratings of mortgage-backed securities) combined with the AIG swindle (that insured the junk loans) to undermine bank capital reserve positions and thus caused the panic.

The banks had their reserves in AAA rated junk. When everyone \"realized\" that it was junk and so was the insurance, the mortgage backed securities market evaporated and the junk (the banks\’ reserves.. aka capital) became worthless.

The panic of the Fall of 2008 wiped out trillions of dollars in capital. I read a statement (don’t remember where..) claiming that as much as $16 trillion of loans would not be made because of the capital losses in the banks. Compare the economic impact of those losses against the $1-2 trillion that the government now is spending to prop up the economy? The govt can spend itself blind on the consumption side and never recoup that scale of lost “money”. So much for Keynes…!

What a mess.

The real lesson here is to watch what your representatives are doing to the market. How are their moves affecting the conditions, incentives and constraints facing the actors in the market? Unfortunately it is easier to blame the actor than the manipulator.

I think what people are having trouble putting their head around is the idea that no one has lost any money at all. In fact, the money simply never existed in the first place. It was at best, a mistake; at worst, a total lie. Instead of allowing investors to reconnect and reassess their place in the market, they\’re raising the economic water level in attempt to rescue a sunken ship effectively drowning the weakest survivors in the process.
By making the cure so closely mirror the disease, it completely legitimizes AIG & Co.\’s out and out sorcery over sound economic policy all but guaranteeing a repeat.
I realized a log time ago that no one man can tell the flowers how to grow – And it\’s a good thing, too. Otherwise I would have descended in to abject paranoia and donned a tinfoil hat by now.

Please keep on bringing up Austrian economics and Mises. Our nation is bereft of truth in economics, having sold it’s soul in the university and the market to Keynesian theories.

It is precisely the manipulation of the interest rates by the Fed and interference by the government that lead us to these watershed moments, when history will be determined. If we could but translate the losses and costs down to the personal level, maybe American would understand how horribly it has been raped.

Keep up the good work