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Steve
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In this 17 min. video Brian S. Wesley says that the 2008 financial crisis was caused by a change in the accounting rules that was made in Nov. 2007 and reversed in Mar. or April 2009. And that since Mar. 2009 the economy has been in a continuous* recovery.
. * . Note he said "continuous" not me.

The rule that was changed is called "Mark to Market".

Note it went in under Pres. Bush II [a Republican] and was reversed under Pres. Obama [a Democrat].

So, a Repud caused the crash and a Dem turned it around.

Who is Brian S. Wesley? I haven't a clue.

https://www.youtube.com/watch?v=RrFSO62p0jk

 
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Steve Cates
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Re: Mark to Market is a bad rule and cued the 2008 crash.
Bush probably knew nothing of the rule, Obama probably knew nothing of the rule. The guy doesn't even pin it on the President.

He said Barney Frank said it was a bad rule so they removed it, but Barney Frank IMHO is the one most responsible for the mortgage crisis in the first place buy pushing the banks to give out bad loans and reduce mortgage buying standards at Freddie and Fannie Mae.

http://www.ecominoes.com/2012/05/frank-and-dodd-started-mort...
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Chris
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Funny how the OP keys in on "It's Bush's fault and Obama fixed it." Yet the video speaker's main point is that government regulations broke the economy but free market is still good and works.

Regardless of that, interesting information about the accounting rule. I wouldn't blame the whole mess on that but some information that it played a part - probably making the crisis even worse. Very interesting stuff and I am sure economists will be studying this crash for the next 100+ years.
 
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casey r lowe
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Steve1501 wrote:
Who is Brian S. Wesley? I haven't a clue.

https://www.youtube.com/watch?v=RrFSO62p0jk

i havent either - but brian wesbury is the guy in the video (probably most famous for this http://www.wsj.com/articles/SB120147855494820719)
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Julius Waller
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Quote:
Prediction is very difficult, especially about the future.


Niels Bohr

Mark to Market existed well before 2008 is still an integral part of US GAAP accounting rules. No idea why you think its been abolished but it hasnt. The most notorious mark to market abuse pre-2008 was Enron who was the first non-financial company to apply mark to market with disastrous consequences.

So what is mark to market?

Quote:
When market prices are used to determine fair value, fair-value accounting is also called mark-to-market accounting.


On the face of it that seems a very reasonable rule but like any rule circumstances sometimes dictate it can have perverse effects. We are boardgamers here, who doesnt know game rules that can be perversely applied to obtain a win?

Quote:
(The regulation requiring a full sequence of railroad operations after each opportunity to play the stock market is to prevent a financial swindle which is too devastating even for 1830. As the rules now disarm this ploy, you need not worry about it. But if you haven’t yet worked out what it is, you ought, perhaps, to be asking yourself whether you are a big enough crook ever to make the big time as a stock racketeer.)


Quote from the rules of 1830 fixing a financial swindle that occurred from a rule that ended the game when the bank went bust in its predecessor 1829.

The justification for mark to market is that the only place where you really know what something is worth is when you try to sell it and you find out what someone else is willing to pay. Any other valuation method involves a subjective assessment of value and is prone to abuse. SO far so good. However this can become problematic in two cases:

1) Your asset's market fair value is not so easily defined as that of an ounce of gold. Enron did this when it market to market the value of its investments by including future expected revenue from it. It claimed to be able to calculate future cash flows (sometimes 30 years into the future) and it valued them at mark to market and included it in their p&l accounts. Any time an expectation fell short a hole was dug that required filling by future earnings - Enron then tried to keep those kind of issues off-balance sheet. At some point they needed ever bigger future projects to maintain their growth line and they went bust. It seems their valuation of the market value was in fact not the market value - changes were then made to reduce any subjective methods from influencing what market values are.

This played a role in the 2008 crisis.

2) For financial companies mark to market seems to make sense. You own a portfolio of shares and they need to be marked to market daily. Everyone knows what your position is and there can be no funny business where you have a capital gains/capital losses account in your books hiding swings in the market. Problem was that a lot of financial companies had some pretty illiquid assets on their balance sheets or assets that became illiquid during the market panic. When there is no market for your asset it loses value very quickly in mark to market. As companies were leveraged this triggered margin calls and forced sales and a further bunch of illiquid assets would hit the market lowering prices even further. Add to that some institutions issued CDOs and other instruments directly related to the solvency of other instruments or institutions and you get a toxic mix. That's the theory that mark to market drove the crisis. In the study I reference above as well as others however it turns out it played only a minor role and then only for very highly leveraged companies. The lack of confidence in financial institutions in general played the largest role and the liquidations were more driven by the need to clear up the balance sheet.

So what's the alternative? Well you can take historical value or adjust based on statistical models of past revenues but as will be immediately apparent those valuation methods also have trade-offs which are more or less severe depending on circumstances. Mark to market's strength is that it blocks persons and institutions from fiddling the numbers until a result comes out that pleases them conversely its weakness is that sometimes the value in the market is not a realistic value. As the old saying goes the markets can stay irrational longer than you can stay liquid.
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Steve K
United States
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Steve1501 wrote:
In this 17 min. video Brian S. Wesley says that the 2008 financial crisis was caused by a change in the accounting rules that was made in Nov. 2007 and reversed in Mar. or April 2009. And that since Mar. 2009 the economy has been in a continuous* recovery.
. * . Note he said "continuous" not me.

The rule that was changed is called "Mark to Market".

Note it went in under Pres. Bush II [a Republican] and was reversed under Pres. Obama [a Democrat].

So, a Repud caused the crash and a Dem turned it around.

Who is Brian S. Wesley? I haven't a clue.

https://www.youtube.com/watch?v=RrFSO62p0jk



It was a contributing factor. As a rule, it's no better or worse than any of the other rules financial institutions must abide by. Probably better than most.

The effect was to create a discrepancy between rated credit instruments and their actual prices. When the floor dropped out from under the mortgage market you had highly rated assets suddenly trading (or rather, not trading) for chump change.

A good analogy would be this: you have a house and a mortgage. You are paying your mortgage. But your neighbor who has a similar house, maybe even better than yours, needs to sell, but potential buyers can't get a mortgage, for whatever reason. Your neighbor dumps his house at a huge loss, in order to make a cash sale. Mark to market requires this information be included in the value of your house, since the two are side by side, and his is maybe even a little nicer, and banks already do this. This is not an unreasonable expectation. Now, even though you are performing on your mortgage, the information suggests maybe you shouldn't. And this is exactly what people started doing. (see "jingle mail")

The idea of ignoring the pricing effects would have prevented the crises is hardly ingenious. It's like blaming gravity for not being able to fly.

 
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Steve
Thailand
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Knewt wrote:
Steve1501 wrote:
In this 17 min. video Brian S. Wesley says that the 2008 financial crisis was caused by a change in the accounting rules that was made in Nov. 2007 and reversed in Mar. or April 2009. And that since Mar. 2009 the economy has been in a continuous* recovery.
. * . Note he said "continuous" not me.

The rule that was changed is called "Mark to Market".

Note it went in under Pres. Bush II [a Republican] and was reversed under Pres. Obama [a Democrat].

So, a Repud caused the crash and a Dem turned it around.

Who is Brian S. Wesley? I haven't a clue.

https://www.youtube.com/watch?v=RrFSO62p0jk



It was a contributing factor. As a rule, it's no better or worse than any of the other rules financial institutions must abide by. Probably better than most.

The effect was to create a discrepancy between rated credit instruments and their actual prices. When the floor dropped out from under the mortgage market you had highly rated assets suddenly trading (or rather, not trading) for chump change.

A good analogy would be this: you have a house and a mortgage. You are paying your mortgage. But your neighbor who has a similar house, maybe even better than yours, needs to sell, but potential buyers can't get a mortgage, for whatever reason. Your neighbor dumps his house at a huge loss, in order to make a cash sale. Mark to market requires this information be included in the value of your house, since the two are side by side, and his is maybe even a little nicer, and banks already do this. This is not an unreasonable expectation. Now, even though you are performing on your mortgage, the information suggests maybe you shouldn't. And this is exactly what people started doing. (see "jingle mail")

The idea of ignoring the pricing effects would have prevented the crises is hardly ingenious. It's like blaming gravity for not being able to fly.


I just said what the guy in the video said. I thought somebody here would like seeing it.

It seems to me that like closing the stock market when it has gone down a lot in 1 day, it would be better to impose a 6 mo. delay in reducing the value of assets being carried on the books. Forcing the neighbor of the guy in your example to sell [or being foreclosed] just makes the market drop more and faster. Not good for anyone.

 
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Steve K
United States
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It would be infinitely better not to tie the political system to unlimited credit, but since it's done, there's fuckall that can be done about it until the nation ceases completely to exist.

The stupid little videos like the one made by this creep is just posturing to agitate for a different distribution of the spoils.

 
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