September 25, 2008
This would be simpler than a bailout
Categories: Housing, Wealth & Poverty, Government Failure, Downsizer-Dispatch
Quote of the Day:
“At this point, Congress is being asked to support an uncertain entity, costing an uncertain amount of dollars, for an uncertain duration – a decision that will have implications for generations to come and requires absolute certainty.”
– Congressman Jeb Hensarling, TX, and Chair of the House Republican Study Committee
Subject: This would be simpler than a bailout
A few simple words in an arcane regulation may be a major cause of the current financial "crisis." Removing this regulation would be simpler and cheaper than the proposed bailout.
Financial Accounting Standard 157 is a regulation imposed on businesses by the quasi-private Financial Accounting Standards Board (FAS). This rule is also incorporated into the regulations of the IRS and is further enforced by the SEC and the FDIC. FAS 157 requires businesses to mark down assets to the lowest price for which similar assets have been sold in the market.
The jargon term for this regulation is "mark-to-market." Mark-to-market forces good securities to be valued at the same price as bad securities.
It's important to understand that a security may be sold at a low price for many reasons. The firm selling the security may simply need to generate cash, and be willing to take a loss for that purpose. A security may also be sold for a low price because one or more of the mortgages behind that security is in arrears or default. But once a security is sold for a low price, something startling happens . . .
All other firms are forced to pretend that their mortgage backed securities are also worth that low price, even if none of the mortgages backing their securities are in arrears or default! This leads to a chain of catastrophic consequences . . .
Company balance sheets suddenly become unbalanced. Credit rating firms downgrade the companies that suffer this fate, resulting in margin calls, higher interest rates, and falling stock prices. Firms that were having no trouble paying their bills suddenly find themselves on the verge of bankruptcy.
This has happened repeatedly over the past few months. In the absence of "mark-to-market" it's possible that no firms would have gone bankrupt, or clamored for government funding.
Treasury Secretary Paulson and Fed Chairman Bernanke have both been asked about the "mark-to-market" problem. They have responded with jargon and gibberish. We suspect that it would be highly embarrassing for government officials to admit that a federal regulation has led to so much heartache for so many people.
House Banking Chairman Barney Frank continually claims that the current problems were caused by deregulation. He, like most politicians, have powerful incentives to always exempt the government from blame. And many CEOs have powerful incentives to remain silent about such things in order to retain access to government favors. The fact is . . .
Were the politicians to come clean about this they might find their careers hanging from metaphorical lamp-posts. And so they will not come clean, but will instead hide behind jargon and gibberish and blame everyone but themselves.
Worse still, they will use their own failures to grant themselves more power.
Now, here is something truly stunning . . . The current bailout plan could have unintended consequences as a result of the mark-to-market regulation. The plan is designed to purchase securities at the lowest possible price, using various tools, including reverse auctions. But think about what this means. Under mark-to-market all holders of similar securities will then be forced to mark down their securities to that lowest possible price, potentially driving many more firms toward bankruptcy, and into the arms of the federal bailout.
Instead of lifting the markets the bailout plan could actually cause a race to the bottom.
Here's what we need to do. We need to continue to oppose the bailout, and to ask for an end to the "mark-to-market" regulation. This would be a simpler approach, and should be tried first. We have created a new "reduce regulation" campaign that you can use for this purpose. Ask for an end to "mark-to-market" in your personal comments. You can send your message using our proprietary Educate the Powerful System.
Fortunately, we still have time to block this in the Senate, so please send a message to both the House and the Senate opposing this bailout. You can use our generic campaign to cute spending for this purpose.
Please also consider making a contribution or monthly pledge to help us weather the economic downturn. You can contribute here.
Thank you for being a part of the growing Downsize DC army.
Jim Babka
President
DownsizeDC.org, Inc.
Technorati Tags: Downsize DC bailout
Posted by James Leroy Wilson at September 25, 2008 - 12:15 PM |
Housing | Wealth & Poverty | Government Failure | Downsizer-Dispatch
login or register to post comments
Send this post to:
Share
2 comments
Bailout
Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.
Our population is about 301,000,000 counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend.
Of course, it would NOT be tax free.
So let's assume a tax rate of 30%.
Every individual 18+ has to pay $127,500.00 in taxes.
That sends $25,500,000,000 right back to Uncle Sam.
But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads
Put away money for college - it'll be there
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs
Invest in the market - capital drives growth
Pay for your parent's medical insurance - health care improves
Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed
by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!
As for AIG - liquidate it.
Sell off its parts.
Let American General go back to being American General.
Sell off the real estate.
Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't.
Sure it's a crazy idea that can "never work."
But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom?
I trust my fellow adult Americans to know how to use the $85 Billion
We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC
And remember, This plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
PS: Feel free to pass this along to your pals as it's either good for a laugh or a tear or a very sobering thought on how to best use $85 Billion!!
Check your math
login or register to post comments
