The Pen Is Mightier Than The Bailout

A twist on the credit crunch I hadn't been aware of until recently: mark to market rules.

I know what these are, because as a participant in the Forex market, this is how I must value my positions for tax purposes at the end of each calendar year. What is it? Click here to find out. What I didn't know is that banks were forced to use this rule to evaluate their assets and draw up their balance sheets.

Briefly, an asset placed under mark to market rules must be shown on a balance sheet at its present value were the asset to be sold right then and there. This means that if the price of the asset is up, one's balance sheet grows, and if it is down, the opposite is the case. This is different from "book value" where you typically show the value of an asset at the time it was acquired - the fluctuations in the bid price (what people offer you for it) after that are essentially non-existent since you are not selling the asset anyway.

Since our banks can loan up to ten times the assets they have on their books, if the value of those assets drop, so too does their lending power. If in turn the value of several or all of the assets are dependent upon the health of credit markets... vicious cycle.

This method of accounting doesn't even take into consideration the income or health (repayment history) of a loan, just what someone hypothetically would pay to acquire it. So if a loan is pumping out huge amounts of interest every year, but for some reason no one wants it, then poof! Dead asset, less ability to lend.

Forget hundreds of billions of dollars of bailouts. Just change this rule! Get rid of the mark to market rule in accounting and let this "problem" sort itself out!