I'm going to belabor the obvious here. I hate to do it, but somebody needs to and nobody else is:
*Calling something a stimulus package doesn't make it one. This one doesn't come close. Read it here.
*If you are headed in the wrong direction, speed is not your friend. Neither is size.
*The rescue of financial institutions is more urgent than a stimulus package and less expensive to taxpayers.
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Paul Volcker on Mark to Market Accounting
Former Fed Chairman, Paul Volcker, Chairman of the Group of Thirty, Consultative Group on International Economic and Monetary Affairs, Inc., just released a study with recommendations on financial reform.
Recommendation #12 on Fair Value Accounting reads as follows:
"a. Fair value accounting principles and standards should be reevaluated with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets.
b. The tension between the business purpose served by regulated financial institutions that intermediate credit and liquidity risk and the interests of investors and creditors should be resolved by development of principles-based standards that better reflect the business models of these institutions . . . ."
Alan Greenspan on Mark to Market Accounting
On November 1, 1990, Federal Reserve Chairman, Alan Greenspan, in a 4-page letter to Richard Breeden, Chairman of the Securities and Exchange Commission, said, in part:
"The Board believes that market value accounting raises a substantial number of significant issues that need to be resolved before considering the implementation of such an approach in whole or in part for banking organizations.
Accounting methodology should be developed to measure the results of a particular business purpose or strategy; it is not an end in itself. For an institution whose business purpose is to trade marketable financial assets on an intra-day basis, for example, closing daily market values would measure the success or failure of that particular business purpose. An end of the day balance sheet, marked to market, is clearly the appropriate accounting procedure in the example.
Generally, the business strategy of commercial banks, on the other hand, is to employ their credit insights on specific borrowers to acquire a diversified portfolio of essentially illiquid assets held to term. The success or failure of such a strategy is not measured by evaluation such loans on the basis of a price that indicates value in the context of immediate delivery. Clearly, one aspect of value in an exchange is the period of delivery. But the appropriate price for most bank loans and off-balance sheet commitments-is the original acquisition price adjusted for the expectation of performance at maturity. It is only when that price differs from the book value of the asset that an adjustment is appropriate.
A reserve for loan losses is such an adjustment. To mark such an asset to a market price intended to reflect the value of a loan were it liquidated immediately is interesting, but not a relevant measure of the success of commercial banking."
A blurry copy of Chairman Greenspan's letter is provided here.
In my last post I made a brief comparison of the TARP and a stimulus package. My principal point was that most TARP activities by the government represent investments that can be sold later under better circumstances and may even turn a profit for taxpayers. Another stimulus package, on the other hand, will involve traditional government spending where a dollar spent is a dollar gone, even if it does some good along with way.
Another distinction is that TARP is designed to prevent a collapse of our financial system of massive proportions that would have severe implications for the real economy. A stimulus plan, on the other hand, has lower stakes, and its long-run cost could more easily outweigh the short-term benefits.
As if we are conducting a lab experiment, we suddenly have the sequels to the two major government programs to deal with the financial crisis and mitigate the real economic fallout. We still, however, don't know the devil in the details, but, while we await more information, let me make a couple of points about general principles.
I couldn't sleep at all last night. It started with a dream-nay, a nightmare-that I had taken a three-week vacation in a remote part of the world where cell phone reception was happily non existent. There were zero bars.
It was a good vacation. I came home refreshed, full of vim and vigor, and ready to re-join the rat race. All that changed when my accountant called with bad news. He said I was broke-flat broke. I thought he was kidding.
Transparency is currently a central banker cause
But it reminds me too much of sausages and laws
I think translucence, like my shower door, is a good compromise
It lets in the light but keeps out the flies
One way the Federal Open Market Committee has increased transparency in policymaking in recent years has been to release the minutes of the previous meeting three weeks after the meeting. This change is important because the public gets to see behind the motives of the last policy move (or non move) before the next meeting. Prior to the change, the minutes of the last meeting were released a couple of days after the following meeting. By then there wasn't much interest in them.
For as long as I can remember people have referred to the Fed printing money-usually when they disapprove. The implication is that printing money is inflationary.
I've always assumed that those who use that terminology understood that "printing money" shouldn't be taken literally. Nowadays, I'm not so sure. Several financial talking heads I've heard recently sound like they mean it literally. Often the context has been whether the Fed might buy longer-term treasuries.
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