How to End the Economic Crisis: Would This Work?

[Better Believe It]

I don't know. Does the proposal by Paul Roberts "suspend the mark-to-market rule" make economic sense? I'm not as familiar with capitalist economics as others on DU so your views on this will be greatly appreciated.

CounterPunch
March 11, 2008

How to End the Subprime Crisis
By PAUL CRAIG ROBERTS



Reforms often do more harm than good. This is currently the case with the “mark-to-market” rule, which is imploding the US financial system by requiring financial institutions to value subprime mortgages at their current market values.

This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value.

The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market.

The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85-90% of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time.

Please read the rest of the article at:
http://www.counterpunch.org/roberts03112008.html

[magellan]

1. Not a clue

I'm over my head on this. But thought I'd give it a kick for attention and to welcome you to DU. :hi:

[jerryme1]

2. K.I.S.S. -- Let's start by getting the hell out of Iraq!!

[Better Believe It]

3. So Is It A Good Or Bad Idea and Why?

I agree with getting out of Iraq but I'm afraid that won't in and of itself solve the huge economic crisis caused by Wall Street speculators and other greedy folks.

So does anyone have an opinion, pro or con, on this proposal?

[SharonAnn]

4. Yes, it could be a good idea. If values are perceived as "collapsing" quickly,

then the write-downs can't keep up with the perceived devaluation. The value of a property could theoretically get to zero very quickly. This approach, suspending the "mark to market" temporarily, might slow down that effect and that may be what's needed to get some rationality in the market.

It would need to be carefully circumscribed with limits and time duration, but could make a lot of sense.

When things are happening so fast that accurate values can't be sorted out, you're really in troubled water.

This alone would not be sufficient but it could be a major part of effective plan.

BTW, I have an MBA, so take this all with a grain of salt. Those who got us in this mess also have one.

(edited for spelling)

[bbinacan]

5. Mark to market, IMHO

doesn't always work.For example, in the 90s and before this mark to market requirement, there was the Van Kampen Prime Income Trust. For years, the fund fluctuated by about 11 cents from it's initial price of $10/share. This fund bought senior debt obligations that were collateralized about 3-1 by hard assets, IIRC. When shareholders sold, they got the non mark to market price, which was good. After they were required to mark to the market, their share price dropped dramatically. So, Roberts has a point.

[Better Believe It]

7. I Hope This Is A Viable Solution

Roberts held a high position in the Reagan administration and certainly isn't any kind of radical that I'm aware of.

Are any prominent progressive economists making the same proposal?

[bbinacan]

9. I really don't know. n/t

[Thickasabrick]

6. Horrible idea - it allows insolvent banks to keep making loans. n/t

[wildbilln864]

8. don't know. nt

[skids]

10. Translation:

We can sell more shells if we don't have to show people whether or not there's a pea inside.

Would it work? Well, if by "work" you mean buy some time -- maybe. But the truth is we're overextended, and delaying the reckoning is just giving creeps more time to jam these timebombs into some undermanaged pension plan or retirement portfolio.

[Canuckistanian]

11. Didn't "mark-to-market” bring Enron down?

Well, that and the fact that the whole company was a giant ponzi scheme.

But, didn't they get caught in a "mark-to-market" scam in one of their offshore front companies?

[Beregond2]

12. Bankruptcy

I think that, as a nation, we should declare bankruptcy, telling China and all the others we owe money to, that we aren't going to honor our debts. Eliminating all tht debt would immediately give our economy a huge boost. It would also destroy our international credit, which would prevent us from borrowing from other countries in the future.

If corporations can do it, why can't countries? They keep saying we should run the government like a business; well, here ya go!

[Better Believe It]

13. That Would Cause An Immediate Depression

Don't think that would work at all. Such an action would quickly bring on a world-wide end to trade and almost an immediate economic depression. And what about "domestic" and "personal" debts? Wouldn't mind forgiving those but that can't happen short of a social revolution.