A lot has been made of the term mark-to-market. Put simply, this is an accounting practice where owners of assets have to place a value on these assets based on the price they can get. Sounds complicated.
I buy an asset. Let’s say I buy a house. This house costs me about $500,000.00. A year goes by and the housing market goes up. The house I bought is now worth $600,000.00. I am worth $100,000.00 more. This is what has been happening around the world for years and bankers, politicians, and investors were happy.
Now let’s say that after a year, the house is only worth $250,000.00. Now I am worth a quarter of a million less. Bankers aren’t happy because they lost value. Politicians aren’t happy because they get large sums of money from bankers (who aren’t happy), and investors aren’t happy because the bankers (also not happy) have lost value in their retirement and investment accounts. This is what has happened over the past year.
Now TV types who study what President Obama calls the daily gyrations of the markets have hypothesised that this rule of mark-to-market is part of the problem. Politicians are considering changing the rules to a mark-to-model method. Mark-to-model is essentially this:
The house I bought for $500,000.00 is now worth $250,000.00. But, because historically house values have increased, and over the past five years have increased at a faster rate than in the past, my house should be worth $625,000.00. If I don’t sell the house (because it will only get me $250,000.00), I can say that my value has increased by $125,000.00. Bankers are happy, politicians are happy, and investors are happy.
The problem is, it isn’t real.
It artificially inflates values (and prices), and keeps assets from coming to their true levels. This causes another bubble in prices, and the whole process that we’ve seen happening (and have seen happen historically), happens all over again.
Look at it this way. If I have credit cards, with no balance owed, but $30,000. 00 in available credit, am I worth $30,000.00 more? Some people would say yes. They consider their credit to be part of their worth, on the asset side. I personally say no way. That money isn’t mine. Not only that, but assuming I use it, I have to pay it back. Where do I get this money from? This is exactly what the banking community and the country have been doing for years.
Just today, I heard Larry Kudlow and some guest whose name I didn’t catch describe mark-to-market this way.
“Forcing sellers who don’t want to sell to set a price for buyers who don’t want to buy, in a market that isn’t working”
They want to get rid of this rule so that bankers don’t have to claim losses on the bad loans they have made. They believe that this will help end the “crisis” that we have gotten ourselves into. They believe, as did Kenneth Lay (former CEO of ENRON) that smoke and mirrors accounting would be better for the country.
Well, I have a bunch of Beanie Babies that I bought in the early ’90s. I guess I can make up some value for them and consider myself richer. The fact that nobody wants them, and won’t pay for them isn’t really important. If you have an asset, the price you could actually get for it is what it is worth. This is the secret to getting out of the depression. Houses aren’t worth what people paid for them years ago. That’s a good thing, because the prices were artificially inflated to the point that people like many young people who are starting out on their own right now, couldn’t afford. When prices drop to the point where these people can afford them, people will start buying again, and the country will be on the way to financial progress, as long as you learn the lessons of the past. And everybody wins.
Will there be any losers in this? Yes. People who bought houses they had no way of possibly affording will lose. People who were looking for quick wealth in risky investments, who lost large chunks of their retirement will lose. Bankers who were greedy and played along, writing the rules of the game as they went will lose. Politicians who either turned a blind eye or deliberately facilitated the fraud and greed (I’m looking at you, Dodd, Frank, Schumer, Geitner, Bush, Clinton, Pelosi, Reid, and any others I might have missed) should lose, but probably won’t.
See, the government and banks have been a huge proof of the truth of the QUALITIES OF SUCCESS, especially honesty. The road back needs to be led by individuals. As more individuals live by the Qualities of Success, acting in ways that are right, then companies and hopefully politicians will do so as well. This is what the election last year was all about. People wanted Obama to be the honest leader he promised he would be. Whether he is or not, it is too early to tell, although he hasn’t demonstrated it yet. My fear is that instead of changing Washington, Washington changed him. My hope is that in the future we make sure politicians understand that we hold them to a higher standard, even as we hold ourselves to an even higher standard.