“Trouble is, the temptation appears strong to continue to repress rather than to confront. After all, while people seem eager to reduce debt and spending and reset the economy, government’s plan, under the prior and current President, is to respond to the excesses with more excesses, especially massive borrowing and spending.”

I’m not convinced anymore that the response is an excess. Clearly, increasing money supply through printing would qualify as an ‘excess’. But I dont think that is the only thing the government did. I am generally of the assumption the government took the ‘excess’ it created and dumped it into very low rate bonds, essentially putting their money where their mouth is and ensuring the safety of their people as being something other than a market sow.

Inflation is not a factor because the money got valued immediately in the bond. The new money enters the money supply and executes its function, it goes directly to the treasury to fill any holes in payments, it does not enter the boomer market, essentially it returns a future value null.

Repression would be a good word for it but it isn’t the full story. The government has been allocating high interest capital through bonds for almost 30 YEARS, keeping the dream alive for boomers, who in turn are feeding families and the stock market. All while asking for very little relative tax in return. People have money! Squirreled away all over the state, nation, world. The government doesnt, but people do. It might be tied up in unbelievably complex financial instrumentation, true but is it better to de-lever some of that apparatus and ensure that government works for future generations or should we continue to let it grow amidst the prospect of a decreasing future labor force? Enter bond buying at rates that account for the state of the union. We are safe, should we not continue that prosperity for the others who would walk in our footsteps?

Dana H’s comment, “As long as it is open about the standards it is following, a company should be free to choose whatever rules it thinks appropriate,” is an intriguing extension of “repression accounting” into deception accounting. It would make it intercomparison between companies’ financial statements well-nigh impossible for an average investor. The truth would be “disclosed,” but buried beyond the competence of anyone but experts, if even them, to discover. This is in a way a kind of ultra-leftist or anarchist proposal — it takes the class struggle to a new level, namely between subclasses of the investing class.

Enter mark-to-market, a rule set to avoid Enron-style asset inflation, and the mother of all unintended consequences was the result. As others have explained, this forced banks and other institutions to value assets that, yes, were worth less than 100 cents on the dollar, but that were still worth in most cases maybe 90-some cents on the dollar at zero. This was sheer folly and was the main reason the credit markets froze, which was the main reason the economy froze, which is now the main reason the entire world economy has all but collapsed.

Yeah, that was a great rule, and it would be just terrible if banks were now allowed to use accounting standards that did not value their mortgage portfolios, most of which are still performing just fine, at zero. The fact is, mark-to-market fundamentalism, in a rare market collapse scenario like we have now, is at least as distorting and damaging as allowing banks or others to inflate their asset values. How can everything just suddenly be worth zero? What sane interest does it serve to insist that is the case? It’s utterly idiotic. Why is that so hard to see?

Fair value mark-to-market (MTM) ITSELF was an example of the repression of reason and logic. Just because a financial instrument that still has active revenue streams will only sell for next to nothing in the midst of a global panic DOESN’T mean that it’s actually WORTH next to nothing. But fair value MTM forced institutions to write them down and then balance their portfolios to maintain capital requirements, this resulted in an irrational selloff that FURTHER eroded asset prices and was instrumental in the global financial death spiral. In the midst of a panic, fair value MTM amounted to voodoo accounting and was counter productive in the extreme. Its repeal (they made it optional) is a return to sanity. geokstr and Mike Devx wrote very reasonable comments, attacking them is just stupid.

The problem is Passive Investing (the idea that there is no need to “time” the market by lowering one’s stock allocation at times of insanely high stock prices).

The market is in its natural state self-regulating. When prices get too high, people naturally sell, bringing prices back down to reasonable levels. But every now and again, the idea catches on that “timing” is not necessary (or not even possible!). Once this idea catches on, the market is like a car without breaks. All price discipline is gone and investors are sure to vote themselves huge raises, setting things up for a huge stock crash down the road a bit.

There have been four times in U.S. history when large numbers of investors have come to believe that it is not necessary to pay attention to stock prices (when we have gone to a P/E10 level above 25). The average price drop in the years following is 68 percent. We have experienced an economic crisis on each of these occasions. There have not been any cases since 1900 in which we experienced an economic crisis without first going to a P/E10 level of 25.

To “time” the market is to care about prices. To cause a stock crash, we first need to persuade millions that “timing doesn’t work.” It’s crazy not to care about the price of any asset you buy. But millions of smart people today believe that “timing doesn’t work.” The popularity of Passive Investing destroyed the mechanism by which the market self-regulates.

Rob

This had unintended effects on banks, which are required to maintain certain levels of capitalization. When the market in mortgage-backed derivatives dipped, banks had to mark down these assets immediately, creating capitalization issues, and forcing asset sales – further depressing the derivative markets.

Present efforts to relax mark-to-market for short-term bank-regulation purposes are a legitimate move to remedy unintended effects of a previous intervention.

Incidentally, this has little to do with the values of underlying real estate.

As for your main theme, there is indeed a widespread effort on the part of the government to refuse to face or to cover up the reality behind the current crisis. But the best word for this is not “repression”. Ayn Rand had a better term for it — “evasion” — which she called the essence of evil.

The principal balances of the mortgages may exceed the value of the underlying real estate, but their true value is dependent upon the actual repayment history of the borrowers. Mark-to-market forced the asset holder to write the value down to essentially the lowest value at the date of the financial statements, based not upon the performance of the mortgage, but based upon the fluctuation of the underlying collateral. The major flaw in this valuation technique was that it would essentially assume that the mortgage asset would have to be sold in a distressed sale during a down market, not in an arm’s length sale despite the intention of the asset holder to hold the mortgage to maturity. Anyone familiar with valuation techniques knows that there is a substantial difference between a liquidation methodology versus a negotiated sale methodology.

Regulations then required that the bank or mortgage holder generate additional capital to maintain leverage ratios based upon this distressed valuation. To generate capital, asset holders sold off their better performing mortgages because they could be immediately liquidated. Unfortunately, this had the effect of weakening their overall mortgage portfolios, forcing more write downs and more capital calls. In other words, requiring banks to value assets at liquidation prices forced them via regulation to liquidate those assets. Mark-to-market rules, ironically, forced banks to act without consideration of the market, thereby depressing the market further.

This is just one piece of the puzzle, but it’s pretty clear that geokstr is not trying to re-inflate the housing bubble.

Would anyone with a lick of sense pay money out of their own pocket to someone else to not use energy? Of course not, but it is government policy to FORCE people to do so.

It is REPRESSION to imagine that there is any financial or accounting sense in negawatts.

Remember, energy is one of Obama’s plank for hopeful change to American society and its economy.

Lenders have not “stopped lending.” When a qualified buyer (i.e., one with enough income to service a loan) applies for a loan to buy a fairly-priced property, he gets a loan at a ridiculously low rate. The “fire sale” argument is nonsense, flacked by people who want bubble pricing to return.

One can call it repression but I prefer to call it self deception because it implies more of an act of volition i.e. we choose to ignore the painful realities rather than repress them.

I see it as all part of a bi-polar culture which is becoming increasingly inter-woven with capital markets that are themselves becoming more bi-polar.

I believe you are wrong on this issue.

Mark to market, passed during Clinton, required daily revaluation of worth based SOLELY on yesterday’s fluctuations in stock market prices. Further, due to other regulation, it required hard currency assets to cover the new valuation (again, based solely on yesterday’s fluctuations). The assets must cover all current debts.

This was inherently unstable. It also led to panics.

Good riddance to mark to market.

The next move must be the reinstitution of the uptick rule.

While “mark-to-market” may have been a reasonable policy in a normal economic situation, it is not in a crisis situation like this. To value your assets at their “current” market value is not always the best nor most realistic practice.

When the bubble collapsed, real estate prices dropped BELOW their underlying intrinsic value in a normal econoomy because of panic. Lenders stopped lending, and buyers stopped buying. This has driven home prices to a “fire sale” level that is not going to be long-lasting. While we may never recapture the real estate values at the height of the boom, the actual value is not the rock bottom we are currently experiencing. Once demand and lending return to somewhat more normal levels, prices will go up again to their true market value.

However, based on “mark-to-market” accounting, all mortgage loans, even those not in default, must be written down to these short-term unrealistic values of the underlying real estate. This one-time “loss” drives a lender’s equity to below the statutory level required, and it can easily go under simply because of this.

Determining how to implement a valuation policy of accounting that does not fall prey to these crisis situations is above my pay grade, but to think that the current depressed real estate values are indicative of the actual value of the property is just as misleading as those prices in the bubble.

One reason why people repress the facts is that most of us don’t even understand the terminology, much less the way all these things interact.