The Better Late Than Never Mark to Market Revision: What the Delay Cost Us...and the U. S.

Finally the FASB has voted to modify the “mark to market” rules which have decimated our financial institutions. Couple that with Treasury Department and Federal Reserve Board announcing a plan to handle the so-called “toxic” assets, we should finally start to see some stabilization in the banking industry, and a thaw in the credit freeze which has been harpooning our economy.

We should be outraged as a nation at the bungled handling of the financial fiasco of the past 6 months. No one has ever accused the Federal government of being competent, but the total ineptness of people who should know what they are doing is beyond all comprehension. It makes me think that it was done on purpose.

The root cause of the financial difficulties was a credit freeze. When Lehman Brothers filed for bankruptcy, it froze the credit markets as people lumped all securitized debt instruments together: good, bad or otherwise. Banks loan money based on their capitalization, usually lending $10.00 for every $1.00 of capitalization. The amount of their capitalization is determined by their book assets. They have to value the book assets by rules established by the FDIC and the FSAB, which included the mark to market rule, recently modified from a mark to model rule.

The result was the banks having to write down assets as the market for their book asset bonds froze up, notwithstanding whether or not the assets were performing. That reduced their capitalization, which in turn prevented them from loaning money. The problem grew geometrically until it was totally out of control.

Instead of addressing the main issue, the Bush and Obama administrations decided to do everything else but…and we will be paying the price for the next 20 years.

Obama’s stimulus package was a sham. This was not a normal recession. It was a credit freeze. The government can spend money from now until the cows come home, and it would make no difference if business cannot borrow money. He knew it. His advisors knew it. And he seized the opportunity to spend us into oblivion while his Treasury Secretary fiddled as Rome burned. Obama used the crisis for social engineering and a massive increase in the power of the Federal government. Only then, was the root problem addressed.

Sound complicated? It is. That is why he could get away with it. But the collateral damage is stunning, including General Motors.

Government under Clinton and Bush forced these financial institutions to loan money to non credit worthy borrowers. As early as 2006, and as late as this past July, the alarm bells were ringing about Freddie Mac and Fannie Mae, and Barney Frank and his cohorts said there wasn’t a damn thing wrong. Maybe we shouldn’t be surprised at the collapse of governmental intelligence in dealing with the issues.

So, here is where we are now. The banking system will start to heal itself. If nothing else was done, the recovery would be rapid and strong. Instead, we have massive unemployment that could have been curtailed had the response been proper. We have massive debt totaling nine trillion dollars within the next 8 years. The US government will sopping up all the available credit world- wide for the foreseeable future. There will be no robust recovery for the United States. What we are going to get is high interest rates and inflation. And a new generation will learn what those older and wiser among us have already experienced under Lyndon Johnson and Jimmy Carter, stagflation. Don’t know what that is? You’ll learn. As I said, we should be outraged.