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A Quick Primer on Liberal & Conservative Economic Theory

We may or may not be in favor of the bailout.  We may or may not fully understand what the bailout will or won’t do.  We may or may not be any smarter than the politicians who (in my humble opinion) don’t have a clue what the bailout will or will not do.  But I am guessing we can all recognize good ideas from bad ideas.  It’s easy: the former stimulates business and the latter stifles it.

Case in point (you can read the full story here):

Congressional leaders scrambled Tuesday to come up with changes to help them sell the failed $700 billion financial bailout to rank-and-file members. One idea gathering support: raise the federal deposit insurance limit to reassure nervous savers and help small businesses…

Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings…

Another possible change to the bill would modify “mark to market” accounting rules. Such rules require banks and other financial institutions to adjust the value of their assets to reflect current market prices, even if they plan to hold the assets for years…

Some House Republicans say current rules forced banks to report huge paper losses on mortgage-backed securities, which might have been avoided…

Liberal Democrats who opposed the bill are suggesting other changes. Their ideas include extending unemployment insurance and banning some forms of “short selling,” in which investors bet that a stock’s value will drop…

The conservatives want to

  • Raise the insured limit on bank deposits.  Of dubious actual benefit in my opinion – but tough times call for paper mache measures.
  • Change the mark-to-market rules.  The mark-to-market rules are onerous to investment companies and do not reflect asset values accurately.  This should have been enacted long ago.  Using the bond concept of yield to average life would make more sense.

The liberals, on the other hand, want to

  • Extend unemployement insurance.  What? To stimulate the economy you want to increase the weight of one of its anchors?  I know this is a liberal favorite but does it have to be trotted out everytime they want to negotiate?
  • Ban aspects of short selling.  Typical of those that neither understand how markets work or how short selling in particular works.  Without short sales we not only lose true price discovery, but more importantly the firms that help insure risk for the creators of debt have no where to lay off that risk.  A two-for-one bad idea.

So we have two camps; one finds ways to increase confidence while improving the bottom line for financial companies, the other looks for ways to stifle business and markets alike.  Is it any wonder big items like the bail out don’t get done?

I am not a big fan of either party, but at times like this the choice is easy.

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  • 4 comments

    4 Comments so far

    1. Michael Cook October 1st, 2008 7:58 am

      Am I the only one that thinks mark to market accounting makes more sense than any alternative? Of course I am not… See http://www.typepad.com/t/trackback/763/34028017

      Sorry for the long URL, but I am not sure how hyperlinks work in comments. If you are valuing a company, particularly an investment company that regularly trades securities, it does not make sense to value any security as held to maturity or any other measure than what it can be sold for today.

      It is only oneorus if you invest in securities that have a very thin market and are hard to value. These securities are the ones causing most of the problems now and the problem is not in reporting their value, but rather the methodology used. In my opinion there should be some rule that forces these companies to use the most conservative approach rather then allow them to make up their own value if there is no market.

      The short selling ban is so stupid, I wont even elobrate on it.

    2. Ryan Ward October 1st, 2008 8:51 pm

      Michael,

      You seem to be in a growing minority and I think this is the main reason why:

      Let’s take an example of a home in, umm, Las Vegas since they seem to be hardest hit right now. OK, so I have this house and it has a value (after all, it’s a house on some land…), but, the market sucks so the value today because the market is bad is ???. I don’t know because there is no market for it. Two years ago, this home was worth $400,000 and the reality is that today, I can’t even sell it because the market is so bad.

      Let’s now say this foreclosed property (valued at $400,000) is on your books. What’s it worth under the mark to market accouting rules? I’m not sure exactly, but, I do know that if there is no market for something it has no value and since there is no market, there is no value (even though it does of course have value). My books have to show show this home with a value of zero under these rules. Does that make sense? This is why it needs to be suspended/changed/altered/something other than leaving it alone becuase it does not and cannot accurately assess value (we already established that even though the home can’t be sold because the market is bad, it does still have some value, we just don’t know how much).

    3. Keahi Pelayo October 2nd, 2008 2:47 pm

      Hmmmmm! Very interesting.
      Aloha,
      Keahi

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