It's the sweet relief that only an accounting rule change can bring. The body responsible for US accounting rules yesterday proposed to tweak guidelines affecting how financial institutions account for hard-to-value securities on their balance sheets, potentially easing the losses and capital-raising requirements tied to holding those securities on their books. The Financial Accounting Standards Board is set to vote April 2 on applying rule changes that could see the accounting board alter so-called mark-to-market rules that became an industry standard under Generally Accepted Accounting Principles two years ago. – NY Post
Dominant Social Theme: So many bad regulations must be changed.
Free-Market Analysis: The Washington set is in full regulatory cry. If only federal legislators had not pressured banks to make unsafe loans. If only regulators had not sat idly by while Wall Street bundled bad mortgages. If only regulators had fixed the mark-to-market problem long ago.
But they didn't and it likely wouldn't have made any difference if they had. When mark-to-market came in at the height of the recent bull market no one minded because the valuations of bank-held securities was very high, according to the market. That the market was inflated by easy Federal Reserve money didn't seem to have occurred to anyone.
Now market-to-market – along with some other regulatory book-keeping demands – is held responsible for the down turn and for keeping good banks down in general. Relax mark-to-market and equity will rebound and banks will have fairer valuations on the books.
In fact, the whole issue of which regulation did what to whom is a kind of regulatory sideshow. Before the 1920s, companies that offered book-keeping to investors were seen as transparent and worthy of consideration. But eventually, regulatory authorities mandated that companies that were "public" keep elaborate books. Immediately a voluntary good became a supervisory loophole. Instead of competing to offer the best possible information, companies competed to make their book-keeping as difficult as possible, if they wanted to hide something from view.
Regulations rarely if ever fix anything. Can they make things worse? Sure. Relaxing mark-to-market for instance may help banks dress up their balance sheets. But if banks do rebound, along with the stock market, increased inflation will be the result – maybe vastly increased inflation.
But even if relaxing mark-to-market makes only a minor difference for balance sheets, regulations mean little in a fiat-money environment. Without a gold standard, valuations fluctuate dramatically over time and have little to do with underlying reality. In fact, in a fiat-money economy it is almost impossible know how much a company is worth or whether its products are even viable.
In America, General Motors may go bankrupt, venerable GE is struggling, AIG the insurer of last resort is virtually ruined. These are some of America's and the world's biggest and most powerful companies. They were not brought down by bad regulations. They were brought down by credit inflation provided by central banking. It distorted valuations over time and made people – and companies – think they were richer than they were. Bad decisions on product lines were made. Over-expansion took place and now even America's and Europe's most globe-spanning firms are just barely hanging on.
The argument over mark-to-market perpetuates the idea that better regulation can rationalize markets and prevent what just happened from happening again. But the whole stock market, from the definition of "public companies" to the regulatory apparatus that has sprung up around them, is a kind of charade, dreamt up to address the problems of fiat-money inflation, which are not to be cured by more rules. Get rid of central banking, return to a private gold standard and throw out the rule book. Let people buy and sell as they wish, fairly and without the threat of fiat-money foolishness inflating their purchases or muddling their vision.