[quote]katzenjammer wrote:
Excerpt from American Spectator piece: http://spectator.org/dsp_article.asp?art_id=13974
[i]The first component of a new rescue plan is to suspend the recently adopted mark-to-market accounting rules and go back to the accounting systems that were used for decades before. Mark-to-market accounting (also known as “fair value” accounting) means that companies must value their assets on their balance sheets based on the latest market indicators of the price that those assets could be sold for immediately.
Under such a rule, declining housing prices reduce the value of all mortgage-related securities, even the over 90% not suffering any default. Fire sales of these securities to raise new capital to meet regulatory requirements drives the market value of those securities down further. Credit agencies seeing declining capital margins downgrade the company’s credit ratings. That makes borrowing to meet capital requirements more difficult. Declining capital and credit ratings cause the company’s stock prices to decline.
This is ending in panic for major companies as lenders cut off all liquidity to firms caught in this accounting death spiral, and stockholders flee in fear that they will be wiped out in any government bailout or bankruptcy. William Isaac, Chairman of the FDIC in the 1980s under President Reagan, recently explained, “During the 1980s, our underlying economic problems were far more serious than the economic problems we’re facing this time around…The country’s 10 largest banks were loaded up with Third World debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of them would have been insolvent”
Isaac continued, “This is contrary to everything we know about bank regulation. When there are temporary impairments of asset values, due to economic and marketplace events, regulators must give institutions an opportunity to survive the temporary impairment. Assets should not be marked to unrealistic fire sale prices. Regulators must evaluate the assets on the basis of their true economic value (a discounted cash flow analysis). If we had followed today’s approach during the 1980s, we would have nationalized all of the major banks in the country and thousands of additional banks and thrifts would have failed. I have little doubt that the country would have gone from a serious recession into a depression.” (Emphasis added.).
Similarly, University of Chicago Law Professor Richard Epstein recently wrote regarding mark to market accounting for today’s mortgage related securities, “Unfortunately, there is no working market to mark this paper down to. To meet their bond covenants and their capital requirements, these firms have to sell their paper at distress prices that don’t reflect the upbeat fact that the anticipated income streams from this paper might well keep the firm afloat.” Alex Pollock, former head of the Federal Home Loan Bank of Chicago, adds that when the economy is in the midst of a severe downturn, the use of mark-to-market accounting “reinforces the downward cycle of panic-falling prices-losses-illiquidity-credit contraction-more panic-further falling prices-greater reported losses-no active markets.”
Chicago economists Brian Wesbury and Robert Stein conclude:
“It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. It is a real shame that there is so little discussion of this reality.”
A second component of a new rescue plan is to suspend all capital gains taxes for 5 years. This would boost the market values of residential and commercial real estate, as well as stock prices. It would draw in capital from around the world for domestic U.S. investment, shoring up the dollar as well. The revenue loss would be far less than the $700 billion Paulson is asking us to hand him to bail out his friends on Wall Street.
Thirdly, the Federal government already has sweeping authority in the FDIC, the Fed, and the Treasury to handle troubled banks and provide funds and liquidity to the market. In a breakthrough article in the Washington Post on September 27, Isaac explained how this can be used to resolve the credit crisis without the $700 billion bailout. In addition, Treasury could be authorized to conduct a new loan program for troubled financial institutions, lending them emergency funds to shore up capital at 2% over market.
Despite Paulson’s and Bush’s hysteria, this would be more than enough. Former House Speaker Newt Gingrich has been a leader in developing alternatives to the bailout. In a speech yesterday at the National Press Club, Gingrich rightly called on President Bush to fire Paulson, saying,
“A plan that relies on the former chairman of Goldman Sachs presiding over disbursing hundreds of billions of dollars to Wall Street is a terrible concept and inevitably will lead to crony capitalism and the appearance of - if not the actual existence of - corruption. The American people understand this and they don’t trust the Paulson plan. Congress should never have been faced with this as its only option to solve the financial crisis. It never should have been confronted with this bill.”
As Mary Anastasia O’Grady noted in the Wall Street Journal on Monday, the hysteria pedaled by Paulson and Bush to justify their $700 billion bailout is only spreading market panic worldwide. Even worse, it is decimating the McCain campaign and its electoral prospects. How is McCain supposed to have a prayer of winning when the incumbent Republican President and his Treasury Secretary are telling everyone that another Great Depression is just around the corner?
To save his campaign, and the entire Republican Party, as well as the American economy, McCain needs to take command. By Thursday, he needs to have organized the House, and Senate, Republicans, behind an alternative rescue plan as described above, without the $700 billion Wall Street bailout. He then needs to go on the offensive against House and Senate Democrats telling them they need to act now or be held responsible for the consequences. The key is that the American people, who hate the bailout, with their feelings about George Bush not too far behind, would rally behind him. That surge of public support would drive Democrats to pass the new, no bailout plan. [/quote]
Good article. I really like Brian Wesbury
IMHO if the bailout bill goes back to the house it will receive LESS votes than before. I cannot fathom a Congressman who voted “No” reversing that vote in light of the alternatives that are coming out that do not put as much of the publics money at risk. There are obviously technical fixes (mark to market, increase FDIC insurance)that are available right now that can be implemented to put liquidity back into the market.
The only thing Congress should do right now is suspend capital gains taxes as RJ posted in the Dave Ramsey article link on another thread.
This $700 Billion bailout has become pure hysteria
