Friday, April 3, 2009

The invisible hand of whatever

I doubt that anyone who reads this blog is a big fan of the "Market." Or at least the notion that the Market makes everything better. Still, on a micro level, supply and demand work pretty well. At least for determining what an item is worth. Let's say I "own" a house and I want to sell it. I put it out for bid, and people looking to buy a house tell me what they'd be willing to pay for it. Whatever the highest bid comes in at is what my house is worth at that moment. I've simplified, hopefully not to the point of uselessness.

There are times, of course, when a value needs to be put on my house without the mechanics of the market involved, say for tax purposes. In order to determine the value here, a neutral party, most often from the government, estimates what my house might be worth these days and taxes me accordingly. Now, you could easily argue - and people on the right especially often do - that the government is not neutral, because they have an incentive of over-value my house in order to collect more taxes. We all know that if there is one thing the government loves, it is collecting taxes.

Now the last person who should be relied on to fairly value my house is me, right? Especially in any meaningful way. For tax purposes, I am going to value my house at $4. If I want to borrow money based on the value of my house, then its worth at least $400,000. Right? We all know this.

So someone, anyone, please for God's sake explain the new mark-to-market rules to me. How in the fuck can it make sense to let banks, not the market, not the government, but banks themselves declare what their mortgage holdings are worth? Am I understanding right that banks are saying, jeebus, no one on the market wants to buy our house for anything more than pennies. And then they say, jeebus the government is saying our house is only worth pennies. But the banks want their house to be worth more. They need to their house to be worth more so that no one thinks they're poor and have no assests, so they are going to be allowed to say that their house is worth whatever they think it is worth? And then borrow money based on that value?

This seems like perhaps the dumbest idea ever. And I don't want to go too far down this road, because I am not a trained economist in any way, but isn't this solution (again) designed to get banks lending money to each other? So if one bank tells another bank that it has holdings worth, say, ten million bars of gold-pressed latinum, it can borrow from the other bank one hundred million bars of gold-pressed latinum. And in turn that bank can borrow even more latinum from the first bank! Yeh! Because what we have here is a liquidity crisis, not an exploision of a debt-based housing bubble, a lack of middle-class jobs, stagnant wages, an over-supply of housing (in some areas), individual debt such that it makes semse to lend money to nobody. Those are problems we don't have. Nope, all we have is a crisis of confidence. If banks are not forced (BY THE GOVERMENT!!!!!) to tell people what their actual assests are worth, but are, rather, allowed to make up whatever they want, then we will all be able to see that Bank of America and CitiGroup actually have lots and lots of money and we can all quit worrying and start borrowing and buying each others houses at wildly inflated prices again.

Seriously, someone tell me where I have gone wrong, because I am starting to sound like someone who raves about these things. I feel like I am one step away from advocating a return to the gold standard here and this not a place I want to be.

1 comment:

Anonymous said...

OK, I think the accounting rule change makes somewhat sense, at least according to the link you provided (of course they will be abused).

Suppose we both own a house together in the SC&A Real Estate trust. As a matter of fact, we rent the house out to someone who has signed a long term lease. Now, of course if we want to sell the house before midnight tonight it might be difficult to find a buyer who will put up a lot of money for it, in particular if that buyer knows that we absolutely have to sell (and there will be no time to inspect the house etc.)

Now the question is whether it is reasonable to assume the price this buyer will offer to be the fair value, if we don't even want to sell the house in the medium term and we have some decent income from the lease. I believe that this would not be reasonable.

So I think it makes sense that if banks value assets such as mortgages e.g. by the value of the expected payments IF they don't want to sell immediately (and I think right now well above 90% of mortgages are being paid on time).

However, suppose that in our example either of us can demand, at any time, to be paid our share of the house in cash. Then we would have to mark the house to market because we have to always account for the possiblity that we have to sell the house. So if a bank has assets that it might have to sell, because a customer wants to withdraw money from an account then those should be marked to market.

That said, I am certainly not convinced that the new accounting standards will produce any sort of accurate and fair accounting (maybe fair and balanced accounting, but who knows)