How to End the Subprime Crisis By Paul Craig Roberts

[Joanne98]

Reforms often do more harm than good. This is currently the case with the “mark-to-market” rule, which is imploding the US financial system by requiring financial institutions to value subprime mortgages at their current market values.

This makes a big problem for balance sheets. These financial instruments became troubled prior to a market being established for them, as they were marketed direct from issuers to investors. Now that they are troubled and with their true values unknown, no one wants them. Their lack of liquidity assigns them a low value.

The result is tremendous pressure on balance sheets. The plummeting value of subprime derivatives is pushing institutions that own them into insolvency, destroying their own stock values and forcing the financial institutions to sell untroubled liquid assets, thus resulting in an overall decline in the stock market.

The solution is to suspend the mark-to-market rule. Instead, allow financial institutions to keep the troubled instruments at book value, or 85-90% of book value, until a market forms that can sort out values, and allow financial institutions to write down the subprime mortgages and other troubled instruments over time.

Suspending the mark-to-market rule would take pressure off the stock market and make it unnecessary for the Fed to lower interest rates in an effort to force liquidity into the economy through an impaired banking system. The problem is not a general lack of liquidity, but liquidity for poorly conceived new financial instruments. Low US interest rates could worsen the crisis by accelerating the dollar’s decline. Now that inflation has raised its head, more liquidity from the Fed adds to the economic distress.

It is mindless to allow a “reform” to cause a financial crisis, but that is what is happening. Unfortunately, there are people who argue that anything less than financial Armageddon would create a “moral hazard.”

It is certainly true that securitized subprime mortgage instruments were a bad idea, that a lot of people who should have known better opened floodgates to greed and fraud, and that “somebody should pay.” But it shouldn’t be the general public and the economy that pays.
http://dandelionsalad.wordpress.com/2008/03/10/how-to-end-the-subprime-crisis-by-paul-craig-roberts/

[Speck Tater]

1. In other words, legalize lying.

Mark to market just means discovering the real value of an asset. The alternative is to let the banks make up their own numbers off the top of their heads about what these assets are worth. It won't make them worth anything, it just allows the banks to lie about their net worth. How can more denial be a solution?

[Demeter]

2. This Is The Sushi Slump Method

It kept Japan from imploding OR recovering for over a decade. The US wouldn't be able to live with it, because there are too many other problems simultaneously erupting.