Sunday, November 02, 2008

Weapon of Mass Devaluation

Even though I do not agree with much of Steve Forbes article, I still would recommend people read it. It is called "How Capitalism Will Save Us" and appears in the Nov. 10th issues of Forbes. The part I disagree with is the implication that all of the current economic problems are the result of mismanagement by the government, which further implies that people involved in dishonest predatory lending, or rating investments as AAA that clearly weren't as being innocent of any wrong doing.

What I really like about the Forbes article is its take on the mark-to-market rule. This is one of those times when you have to accept we don't live in a perfect world. Yes with out mark-to-market people can abuse the system. With it, other people can abuse the system in a different way. You have to pick the lessor of two evils.

Read at least the last half of the Forbes to understand all of it. But the following paragraph is what I find key. I commend Steve Forbes for pointing out the issue with mark-to-market which is what really made this a Perfect Storm. As the train wreck has gone on, I've been surprised that there hasn't been more coverage of this in the popular press.

Result: Investment banks that still had positive cash flows found themselves in a death spiral. Of the $600-plus billion that financial institutions have written off, almost all of it has been book writedowns, not actual cash losses. This accounting madness sank Fannie and Freddie this summer when the government effectively took them over and provided them with a $200 billion loan facility. The two entities are still cash positive and haven't drawn down a dime of this new line of credit.
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