Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.
Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks' capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.
If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling.
Sunday, March 8, 2009
Whether or not to keep in place the rule that banks should mark their assets to market is a major issue these days. I've seen lots of arguments pro and con. I would recommend this article by Steve Forbes, who I think has proved to be a consistently excellent thinker and all-round economist over the years. Mark to market accounting is a tragic legacy from the Bush administration that Obama should dump posthaste. Doing so should go a long way to fixing our current banking crisis. Some excerpts:
Posted by Scott Grannis at 8:08 AM