Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don’t stick the rest of us with their losses.
It’s not hyperbole to say the Republican and Democratic backbenchers who defied both parties’ leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.
Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee — such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul — spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn’t jibe with members, and certainly not with the American people.
And some smart folks were coming to the realization that in addition to the $700 billion price tag, the bailout could actually make economic problems worse. The market’s sudden rise after the bill’s defeat, as Cord Blomquist notes, shows that uncertainty (including fears about the destructive provision in the bailout bill) was in large part responsible for the market’s volatility. As I wrote in today’s American Spectator, the bill could have caused rampant inflation and worsened the mark-to-market accounting problems by forcing banks to “write down” their assets to the price the government pays for similar assets. Thus, the bill could have spread the credit constraint contagion even further, and the market was rightly concerned.
And speaking of mark-to-market, this accounting issue once considered to be obscure played a prominent role in the House floor debate. Louie Gohmert (R-Texas), Darrell Issa (R-Calif.) and Jeff Fortenberry (R-Neb.) all correctly noted that if Treasury Secretary Hank Paulson and regulators would simply let these securities be valued at the price Paulson wanted the government to pay for them — instead of the last fire sale price per mark-to-market rules — it would largely do what the bailout intends without putting taxpayers on the line.
Even proponents of the bailout, such as Gary Miller (R-Calif.), called for mark-to-market reform. And to top it off, House Financial Services Committee Chairman Barney Frank, said he was sympathetic to responsible community banks dealing with the accounting issue, but said Congress shouldn’t legislate accounting standards. But Congress has a responsibiliy to legislate, because accounting standards have the force of law when, like mark-to-market, they are enforced by the SEC and banking agencies.
CEI will continue education on the real Big Government causes of the financial crisis and real solutions like reforming accounting rules, the credit rating state-enforced duopoly, and the big enchiladas of Fannie Mae and Freddie Mac.
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Why not let them price their assets at infinity? That would solve all their problems!
Seriously, as far as I can tell, if mark-to-market accounting is an important driver of market outcomes, then that's solid evidence the Keynes was right: people have “nominal stickiness” in many, many areas of their lives.
Case A: People would rather raise the risk of losing their jobs than take a nominal wage cut.
Case B:. People are willing to lend to firms that look good on book values, even if market values are in the tank.
If these are true facts, then those who want to understand market outcomes need to look long and hard at psychology: Framing effects, status quo bias, etc.
The key question is this: What does the (alleged) importance of mark-to-market tell us about other psychological factors driving investment decisions? If adding an extra zero to the accounting report can make a firm “rich” and “trustworthy,” (as implicitly alleged by the pro-book-value folks) then will using italic fonts do something similar? If not, why not?
Could Morgan Stanley have been saved by mere cosmetic interventions such as dressing in nicer suits, getting a better website, or painting the hallways in a brighter shade of taupe? If not, why not?
More seriously, what other merely cosmetic **accounting** changes could be having a big impact on the decisions of financial market participants?
Cosmetics matter, say the anti-mark-to-market folks. So let's find out which cosmetics work, which ones don't, and (most important) why cosmetics work at all.
Whatever answer we find, it is likely to be an answer that makes Keynes and the behavioral economists look good.
Funny, it looks to me like the DOW plummeted. Shouldn't you guys look this stuff up before repeatedly using the argument that the market went up? I don't disagree with your conclusions, but saying things so blatantly contradicted by reality does not help our cause.
No America will not turn into France, or other European countries, at this critical stage, we will most likely turn into Brazil. Start building your gated communities and hiring armed guards when shopping.
Yes, well if the economy goes into even a shallow depression say with 10-14% unemployment, or a ten year Japan Style stagnation we'll get New New Deal. That wont be a victory for freedom and liberty.
Haha. There's gonna be changes alright!
The market recovered some of the losses initially after the vote then tanked again. Maybe you should look it up.
I believe “mark to market” accounting is a consistent and sensible practice if the market prices are taken to be an average over many recent transactions. When the practice requires valuing assets to the most recent transaction it runs into two predictable problems:
1. The large fluctuations in a volatile market means that this value has no persistent meaning beyond a few seconds going forward.
2. It leads to an instability of confidence where each downward price change impels irrational transactions that tend to further lower the prices without any relation to real world information and data of the asset.
Two ideas come to mind: Time average the mark to market rule as Newt Gingrich is proposing. Or put a floor under the mark to market valuations to be some fraction of the conventional economic value- say 50%.
The way to make money on a distressed security is to hold it in a well-capitalized account in which the daily fluctuations of the market are irrelevant. Instead of valuing it at the most recent panicked transaction, one values it according to the textbook: as the discounted sum of all expected interest/dividend payments plus a projected value at maturity. This is exactly what the Paulson bailout plan does, giving those securities to the Treasury. I suppose that's a roundabout way of saying that the Treasury hopes to save the day by exempting itself from the mark-to-market rule.
But if this is good enough for the Treasury why not let the banks do it directly?
Ha, ha! Stop turning America into France, indeed! Is this an American problem that has spilled over to France or a French problem that spilled over to America? … Thought so.
Our concern should really be how to stop France turning into America then maybe America will have someone to trade with when it comes out of this crisis!
Even the Financial Accounting Standards Board’s couldn't figure out how to deal with the mark-to-market accounting shortly after the Enron debacle. Even the Arthur Andersen accounting firm had problems with it which led to its failure too. Enron filed for bankruptcy 2001. The Financial Accounting Standards Board’s has had 7 years and they did nothing. nomedals.blogspot.com
The media really seems to be twisting how Americans feel about the bailout and this bill. The media seems to keep repeating that Americans don't want this bill to pass and we don't understand what will happen if it does not pass. That Americans don't understand how the system as a whole will be affected if this bill is not passed. This is not accurate. Most of us Americans are not as ignorant as this current administration and have seen this coming for some time. We are not saying that something should not be done. We are saying that this bill is not right and should not be passed. We want an alternative!!! This bill is insane and really does not involved the average American. We need to come up with a bill that corrects the problems at hand and resolves these issues. The American people need more in return. We need to be helped out. This bill stinks and we need to come up with something better that involves helping out all Americans directly and not just the top of the chain and expect this trickle down effect to work all of the sudden. It hasn't worked what will make it work now? Why are we throwing more wood on a burning fire? Lets let the fire burn out and then build accordingly. We all agree that something needs to be done. But don't let that make us pass this insane bill that is not going to correct the problem or truly help your fellow Americans! Draft a new bill with head economists and have it open for discussion. And by not passing this bill is not what is hurting the market it is the fear that the government that has forced upon this nation that is hurting the market. They are manipulating the market right now with this fear method that they always do to get done what they want. DON'T LET THEM PASS THIS BILL! IT WILL NOT WORK AND IT IS BOGUS. Make congress come up with another option bill that helps out everyone and does not mainly focus on Wall Street and banks. We have to do something but this bill is not the solution and I think everyone knows that. That is why it failed Monday.