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Today on CNBC they said one could make a pile of money if one could guess when they would raise rates again. This highlights one of the biggest atrocities in the World’s economic system. Trillions of dollars are tied up in the currency futures, hedging the wild swings in the value of currency, trillions that could be invested in productive activities, if only the world had a stable unit of account. The price of commodities didn’t budge an inch from 1920-1971, 51 years of the greatest economic growth in world history. Then in 1971, at the urging of the monetarists, Nixon closed the London Gold window. Gold was $35 an ounce then, and oil was $3.50 a barrel. Inflation is not a natural occurring phenomenon, and especially not due to growth and prosperity. The only thing that causes inflation and deflation is an imbalance in the amount of liquidity in the system, a balance that is the single and only charter of the Federal Reserve. It is a failure of epic proportions.

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3 Democrats Could Block Health Bill in Senate – NyTimes.com

United States Senator Blanche Lincoln
355 Dirksen Senate Office Bldg., Washington, D.C.  20515
Office:  202-224-4843; Fax:  202-228-1371.

Hi,

I want to go on record as supporting Sen. Lincoln in being AGAINST the Health Care Bill. I believe real Health Care reform could be accomplished by simply removing the regulations that are in place that protects false monopolies in the industry. Blue Cross’s 70%+ market share in Arkansas, for instance, is not something they “earned.” They have that and their high prices simply because of regulations, perhaps at the state level, that crowds out honest competition. A real health care reform act would simply bring down the walls to honest competition and thereby lower prices for all. Another government bureaucracy, especially this one, would simply create another endless money pit that would perhaps bankrupt the Country (some analysts believe Medicare itself is capable of that) but for sure give no value back to the people, as taxes would rise and the money would flow to people who have not earned it, the various “hangers on” and other dishonest people close to the system, who, as is the case with all government programs, are simply there to scoop up the money without providing value.

Thank you for your time,

Stephen Pickering
Little Rock, Arkansas.

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Article 1

1. The Health Insurance Industries’ exemption from the Sherman Anti-Trust Act of 1890 is hereby revoked.
2. All citizens of the United States shall not be barred from purchasing Health Insurance from any company or individual, foreign or domestic.
3. All policies may be written in any manner, for any amount, with any provisions the contractor chooses and the contractee accepts.
4. Congress shall make no laws regulating the contracts or any of its provisions for Health Insurance legally signed between the contractor and contractee.
5. Congress shall pass no laws forcing any United States Citizen to purchase Health Insurance.

The End.

This meeting is hereby adjourned.

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In 1989 after the Berlin Wall came down, Boris Yeltsin, then Russia’s President, immediately handed over his countries largest industries to a handful of oligarchs. We all know what happened after that. One part of the Russian economy blossomed and was a raging bull market in the late 90s. Anybody who owned a Russian or Eastern European ETF, remembers those days fondly as their portfolios boomed, and there was the definite sense of a World changing paradigm shift underway. Simultaneously, in America the great internet, communications revolution was exploding, unleashing an unprecedented wave of legitimate wealth, creativity, and freedom to the people. No wonder, as the year 2000 approached, there was a palpable feeling in the air that the new millenium was about to usher in, not an Armageddon of religious prophesy, but a dawning of an age of Aquarius where a sense of wealth and freedom would manifest, a true Golden Age like no other. There was indeed “exuberance,” but it was not as Mr. Greenspan said, “irrational.”

The most important point to remember why this isn’t working is that crony capitalism is not free market capitalism. It’s national socialism. It’s like what Warren Buffet said, ‘The next best thing to a monopoly is a duopoly.’ He was referring, at the time, to the national socialist organizations Fannie Mae and Freddie Mac. We know what those two organizations were and what they did: Created the national housing crisis while stuffing the pockets of power with unearned millions.

What knocked the wheels off this apple cart bringing the “forbidden” fruit from the Garden of Eden? It was not the desire of the people, the “unwashed masses” to be rich and free or the greed of entrepreneurs, as the Establishment and its mouthpiece the corporate “mass” media would have us believe. On the one hand in Russia, the abuse of the Oligarchs, which is not a free market system (analagous to our Financial, Energy, Insurance, and Telecommunications industries in America), created a wave of crime and instability that was too powerful a force for the freed “cottage” industry system, a true free market, freed by eliminations of regulation and a 13% flat tax, to bare. The Russian Oligarch abuses and criminality is well documented, and what it did was open the door for an authoritarian style regime, led by Vladimir Putin, to fill the vacuum. In America a watered down, but no less effective, version of this took place with its epicenter being the Telecommunications Act of 1996 which caused the internet crash of 2000. On the surface it seemed as if the act was designed to protect the little guys and restrict the Oligarchs of Telecom. But this was a “false flag” destruction, creating a false vacuum of national socialism, or Oligarchy. The bill was designed, not to help small telecoms, but to put a knife in the side of free market creativity by retarding the natural flow of capital into this industry. The result is what we have today, an Oligarchical system in the Telecommunications industry, controlled by a few small players. These are false monopolies, false vacuums if you will, created and protected by Governmental regulation. This is national socialism which has nothing to do with free market capitalism.

The same system holds sway in America’s Health, Energy, and Financial industry. Who writes the policies for these industries? The Oligarchs and their paid for representatives in the Government. Witness Dick Cheney and friends writing energy policy in the early part of this decade. But this same playbook has happened in Insurance, Financial (need I remind you of what came to fruition last year there?) and Telecommunications.

The Health Insurance industry is an Oligarchichal, Government Regulated, Protected system that gives us higher prices and lower quality at we the people’s expense, for the benefit unearned gains of a few powerful elite class of Oligarchs.

But the solution to this national socialism is not “socialism socialism”, whereby the quality degrades even further, and the prices do not go down but are simply transferred from bloated premiums to bloated taxes, and the power and money is pocketed in an unearned fashion by the same people, simply wearing different hats. What’s even worse about this scenario is that, since the majority of tax money is pocketed by governmental Oligarchs and their various pals and interests, the debt will crack the U.S. Government, like it did the Soviet Union, and which Medicare itself threatens to do all by itself in the next two decades.

The solution to the Healthcare problem is simple. It’s almost too simple for people to accept. “De-regulation” has an ugly connotation. People have the subconscious sense that regulation is always beneficial to the people. And indeed a lot of it is. Real justice as regulation, the rule of law as applied to justice is a benefit, indeed a necessity to the public. But regulation in the name of protecting a false vacuum, a false monopoly, Oligarchical system such as what exists in the Health Insurance Industry today, works against the people and works against prosperity and creativity.

All that needs to happen to bring down prices and increase quality in Healthcare is to outlaw governmental lobbying, to outlaw the Health Insurance Oligarchs from writing Healthcare Insurance regulation and policy. The effect of this so far has been eliminating free market forces from bringing efficiency to the industry. The Healthcare Reform Act could be written on one sheet of paper. One of the most important revisions would be to allow all citizens to buy health insurance in a free open market from anywhere in the country, anywhere in the world for that matter. In other words, regulate against fraud and misconduct but don’t regulate against free choice (for the benefit of a few large corporations to ride an unearned money train). If such an Act were passed a flood of capital would come flowing into this market and a rich ecosystem of diverse, energized, competition would blossom, fulfilling every niche in American society with a cornucopia of products and choices. Not only would needs be met, but opportunities would also manifest. Innovation, like it always does, would spur quality and efficient prices to the consumer and wealth and abundance to a whole new generation of entrepreneurs who would simultaneously create great paying, fulfilling jobs to the society itself.

The premise of free market capitalism is this: Whenever wealth is created in an open, free market, in an ethical, non criminal, non false vacuum way (meaning propped up by Government protection disguised as “regulation”), the benefit to society as a whole and the individual is inversely proportional to the wealth that is generated for the capital, businesses, and individuals invested.

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I was so excited. This is the email I wrote to her:

“Dear Senator Lincoln,Thank you for sponsoring S.604.

Perhaps the largest problem in our and the World’s economy is an unstable unit of account, the wild swings in the value of our money. The sole charter of the Fed is to stabilize our unit of account and yet in a misguided effort, they do just the opposite: they cause the wild swings which result in inflation and deflation that reek havoc on the economy. All that has to be done is for them to target the gold price instead of targeting the interest rate. When the price of gold becomes to high, they should sell bonds to soak up the excess liquidity. When the price of gold becomes too low the can inject liquidity by printing. If they just followed this one simple rule there would be no more inflation or deflation, and the economy would have exactly the amount of liquidity that it demands. I also worry about the ever increasing amount of regulatory power they are being given. They should be reigned in and held accountable, not given more unaccountable power. If they are indeed a branch of the government, they should work for the people and be held accountable to the people and its representatives. If they are not, then the Congress should take back its Constitutional authority to coin money.

Thank you again,

Stephen Pickering
Little Rock, Arkansas

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(Two email letters I sent concerning this subject)

March 22nd, 2009

Dear Adam Curry (@adamcurry),

Ending inflation and deflation is very simple. All that has to happen is for the Fed to keep the dollar/gold ratio in a tight range by printing dollars when the price of gold gets too low (ie 1997, $10 barrel oil) and selling bonds when the price of gold gets too high (ie Now!) to soak up the excess liquidity. There was no inflation or deflation until 1971 when Nixon closed the London Gold Window where one could exchange 35 dollars for an ounce of gold. Oil was 3.50 per barrell. When he closed the London gold window, the dollar became a floating currency and the great inflation of the 70′s began. There was no energy crisis. There never has been. We don’t need a Gold Standard per se, where we actually store the stuff, we just need a de facto Gold Standard where the relationship between the paper currency and the metal stays steady. The Fed has the tools to do this easily. Why is it not done? Because the establishment knows how to profit from these wild swings in prices, while the common man gets screwed. If you look at a chart of oil from 1920 until now it basically doesn’t move until 1971, and then the line goes up like Mount Everest. How is this possible during a time when the car and airplane were invented? Its simply because all inflations and deflations are monetary, ie floating currencies, and when the supply and demand of money itself gets out of whack so do the prices of all the commodities. You ask about a World Reserve Currency. We have one. Its called Gold. Everything is ultimately priced in terms of it.

Stephen Pickering (@pickering)

Little Rock, AR, US

Crude Oil Chart 1920 til present:

March 23rd, 2009

To: Mr. Sergei Perminov, Rye, Man, & Gor Securities, Moscow, Russian Federation

Dear Mr. Perminov

Your quote in the Moscow Times is absurd:

“This is all in the realm of fantasy,” said Sergei Perminov, chief strategist at Rye, Man and Gore. “There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.”

http://www.themoscowtimes.com/article/600/42/375364.htm

The Gold Standard didn’t end badly. Nixon closing the London Gold Window in 1971 is what has ended badly. In other words, getting off the gold standard is what has ended badly. Look at this oil chart from 1920 until today. Look what it did beginning in 1971 when Nixon took the dollar off a de facto gold standard:

The only solution to this is having a “de facto” gold standard whereby the Fed keeps the dollar in a stable relationship with the price of gold. It can easily do this by printing currency when the price of Gold starts lower too much and vice versa selling bonds into the open market to soak up excess liquidity when the price of Gold begins to get too high. That’s the only way to end inflation and deflation that never existed before 1971. Keeping things the way they are will only keep the misery going. Look where its got us. The common man gets ruined, businesses can’t plan, and the engine of the economy has a monkey wrench thrown into it without a stable, standardized unit of account.

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And the Crisis is purely a fiction. I am listening to Bernanke in the background testifying in the Senate. None of this would be happening without the Mark to Market rule. None of it. 8% of mortgages have defaulted. Mark to Market has caused 100% of them to marked down creating billions of false, paper losses, and a false lowering of assets, which brings in the regulators applying Capital Requirement Rules, which legally keeps the banks from lending. This freeze has been and continues to be created soley by the Federal Government. Pete Townshend is right. We do live on an immanence front, and it is purely a put on.

The Credit Freeze is 100% purely created by the government, and the solution can be implemented in one day. Simply eliminate “Mark to Market” and return the billions in false paper losses to the banks, so that their Capital structure is sound, their stock prices go back up, and they lend again.

I just heard Bernanke say “There is no ‘magic bullet’” Yes there is. There actually is no “Crisis” but since we are playing make believe, the Magic Bullet is simply to illeminate “Mark to Market” and it all magically goes away. But it is more advantageous to the Establishment to have a Crisis, because they know how to use it to their advantage.

It just occurred to me that this is an exact mirror of the false crisis of the immanence of Iraq’s danger to the U.S. used as an excuse to spend a trillion, actually to line pockets with a trillion. This is a false domestic crisis used as an excuse to spend a trillion, actually to line the pockets of legalized thievery with a trillion. Only its in the name of a “Domestic Crisis” instead of a Foreign Affairs “Crisis”

I posted this on the GilderTech Forum. Here were some responses:

GTF Member 1: “Art Cashin, on cnbc, was begging for them to reinstate, try it for 6 months, it costs nothing and (I think) he feels this would solve the crisis.”

GTF Member 2: ” why do you think Bernanke, the historian, who knows what happened in the 30s with mark to market isn’t pushing to suspend it. How about the banks and Larry Summers, not sure what geithner’s agenda is but Bernanke must be aware of the history of and problems with mark to market. Brian Wesbury has been pushing this and telling everybody to call their congress people but why will they listen to us, the unwashed masses?”

GTF Member 2 again: “George, any insight on this refusal to suspend mark to market?”

Me: “What do Mortgage Backed Securities consist of? Just the Mortgage itself or are they mixed together with other instruments including the debt, warrents, preferred or common stock of the bank itself? What is causing the ‘cloud’? Because even Mike Holland said last Friday there were private investors ready to come in and pay 27-30 cents on the dollar for the so called “toxic assets” until the ‘cloud’ of Government intervention itself stepped in and then they froze and stepped back.”

Me: “I thought Mark to Market wasn’t initiated until 1992. I thought I heard Steve Forbes said that. Not true?”

GTF Member 3: “Yes, creating and using big problems is part of the plan for the “New World Order”.

***
Am I right, or am I right?”

GTF Member 4: “I think the “crisis” was created by short sellers, possibly with political interests, who leveraged the rule in September by shorting assets that were used as collateral and, as a result, creating huge and predicable margin calls in the finance sector.”

GTF Member 5: “Brian Wesbury – 2-23-09

Don’t Nationalize; Suspend Mark-to-Market

We have been accused of beating a dead horse when it
comes to our support for either suspension of, or targeted
relief from, market-to-market accounting.
And we suppose after writing thousands of words,
producing videos and giving speeches about the issue, some
might be tempted to let it go. But, we can’t do that,
especially when the government continues to spend trillions
of dollars and is coming very close to bank nationalization.
This is a real shame. Suspending mark-to-market
accounting could fix major problems at no cost.
Unfortunately, many people dismiss this issue without really
understanding its impact on the economy.
The history seems clear. Mark-to-market accounting
existed in the Great Depression and according to Milton
Friedman, who wrote about it just 30 years after the fact, it
was responsible for the failure of many banks.
Franklin Roosevelt suspended it in 1938, and between
then and 2007 there were no panics or depressions. But,
when FASB 157 went into effect in 2007, reintroducing
mark-to-market accounting, look what happened.
Two things are absolutely essential when fixing financial
market problems ‚ Time and Growth. Time to work things
out and growth to make working those things out easier.
Mark-to-market accounting takes both of these away.
Because these accounting rules force banks to write-off
losses before they even happen, we lose time. This happens
because markets are forward looking. For example, the price
of many securitized mortgage pools is well below their value
based on cash flows. In other words, the market is pricing in
more losses than have actually, or may ever, occur. The
accounting rules force banks to take artificial hits to capital
without reference to the actual performance of loans.
And this affects growth. By wiping out capital, fair
value accounting rules undermine the banking system,
increase the odds of asset fire sales and make markets even
less liquid. As this happened in 2008, investment banks
failed and the government proposed bailouts. This drove
prices down even further, which hurt the economy. And
now as growth suffers, bad loans multiply. It’s a vicious
downward spiral.
In the 1980s and 1990s, there were at least as many, and
probably more, bad loans in the banking system as a share of
the economy. The difference was that there was no mark-tomarket
accounting. This gave banks time to work through
the problems. At the same time, the US cut marginal tax
rates and raised interest rates, which helped lift economic
growth. Time and growth allowed those major banking
problems to be absorbed (even though roughly 3000 banks
failed); without creating an economic catastrophe.
In Japan, during the 1990s, the government allowed
banks to operate without ever even recognizing bad loans,
which certainly bought time. However, Japan increased
taxes, which undermined growth, creating an economic
catastrophe. The real problem with Japan was not zombie
banks, it was that there was no growth. After all, foreign
banks were allowed to lend in Japan, but stayed away
because the economy was not vibrant.
Suspending mark-to-market accounting is a cost free
way to buy time. It does not allow banks to sweep bad loans
under the rug. Bad loans are still bad loans and banks cannot
hide from them. Not suspending it, while at the same time
interfering in the economy with massive stimulus bills and
bank nationalization, is a recipe to undermine both time and
growth and therefore hurt the economy even more.”

Member 4 again: “Published at Next Inning on January 23rd:

As was the case with reinstating the uptick rule, I was an early advocate for suspending the Mark to Market rule and replacing it with a system that I think would offer greater transparency, a more realistic picture of value, more stable asset pricing and lower volatility. With these benefits, I think it would also lessen the risk aversion that envelops our markets and help slow the deflationary pressures most asset classes are seeing today.

The short story is that Mark to Market rules weigh the liquidity portion of the value proposition way too heavily. Due to this, in a Mark to Market world, asset values are needlessly and dangerously volatile. When liquidity was good, certain liquidity sensitive asset values were too high and now that we’re suffering through what I termed in August 2007 as “The Global Freezing of Liquidity,” these liquidity sensitive asset values are being calculated as being too low. Let’s take a minute to look at what happened when liquidity was high before we evaluate what we’re facing today.

When Liquidity is Too High

The ultra high liquidity that former Fed Chairman Alan Greenspan dumped on the market and the leverage mills it created that our government refused to regulate are at the core of our problems we face today. During these times when money flowed like spiked kool-aid, bankers could easily “package” all forms of debt into fancy alphabet soup securities and sell them to a market that was punch-drunk thirsty for extra yield. Even ratings agencies used the artificially high liquidity of these instruments to justify giving many of them their highest possible credit ratings.

One example of the problems caused by this seemingly innocent system of valuation was the once very popular ARS (Auction Rate Security). ARS’ were not invented during the hyper-liquid times we abruptly exited a couple years ago, but it was during those years that they rose from being a niche instrument to a mainstream method of juicing returns in what corporations could term as “cash equivalent investments.” This market was created by the convergence of low Treasury yields, which is what corporations normally used for cash equivalent investments, and too much liquidity (a lot of cash in the system).

Stated in overly simplified terms, the backing of an ARS is a long-term debt obligation, often from highly credit-worthy institutions like Georgetown University or solvent municipal governments, that is recast as an ARS in a fashion that allows it to masquerade as a short-term investment. To set up this marketing ploy, investment banks put together packages of these credit-worthy long-term debt obligations and held weekly, bi-monthly or monthly auctions; hence the name “ARS.” Due to the fact that these ARS’ were traded on a frequent basis, they met the FASB definition of “cash equivalent” and were therefore allowed to be carried at the top of corporate balance sheets as a current cash asset.

This scheme worked really well so long as the system was drowning in liquidity and Treasury rates were unreasonably low. Under these conditions, there were seldom shortages of interested auction participants. To back the image of liquidity the banks were selling, when there were temporary shortages of bidders, the banks themselves would step up and fill the void – kind of like the shill at a three card monte game would bait the next sucker. And why were banks doing all this? Simple, they were raking in handsome fees on the spread between the long-term rates and the short-term rates. Banks would collect the higher long-term rates and sell the ARS’ at a premium just slightly above the short-term rate to customers that clearly had more cash than brains.

Bottom Line for the Good Times: So long as the snake oil selling banks could lure suckers to its auctions, they could find bidders for ARS’ and the Ponzi-like scheme worked. However, just like when candidates for the next link of a chain letter disappear, so did liquidity in the ARS markets and, as a result of Mark to Market rules, so did the value of the ARS elixir that was sold as the “cash-equivalent” cure for low Treasury yields.

When Liquidity is Too Low

As the spigot of liquidity was tuned off, the auctions for ARS’ ceased. Without these auctions that provided liquidity, ARS’ instantly went from cash equivalents that carried the highest possible ratings from our “respected” ratings agencies like Standard & Poor’s, Fitches and Moody’s, to illiquid assets with no valid open market measure to determine their value. Simply stated, there were no markets for these assets and in a Mark to Market world, when there is no current market yard stick to use in the measurement of value, the corporations that owned the ARS’ were put in a box.

When liquidity disappeared so did the high credit ratings that the ARS’ carried and, in many cases, this happened nearly overnight. This meant corporations had to do two things.

First, corporations were forced, and rightfully so, to reclassify these assets as long-term versus their former short-term “current asset” classification. This meant they could no longer list these assets on balance sheets as cash equivalents and thereby be considered by investors a part of the net cash balance. This is a very big deal since popular valuation methods for corporations add net cash dollar for dollar to the value of a company, but all but ignore the value of “long-term investments.” Worse yet, many corporations, particularly in the financial world, which used the value of these assets as collateral for loans received the dreaded margin call – put up cash or repay the loan.

Second, the corporations holding ARS’ were forced to use Mark to Market rules to determine the value of these ARS’. The problem was that no market existed. Due to this and the real threat posed by Sarbanes Oxley (SarbOx) rules that could result in executives being fitted for orange jump suits and connected bracelets, corporations took the only logical road; they wrote the values down sharply so that neither attorney generals nor shareholders in class action law suits could accuse them later of inflating their balance sheets.

Bottom Line for Bad Times: When liquidity was high it juiced valuations so much that instruments like ARS’ and securtized mortgage debt was spun into a potpourri of alphabet soup securities and sold like hotcakes. This created a wide and complex infrastructure designed to feed the demand for these investments and, in time, some aspects of this structure got sloppy, greedy and rife with corruption. However, when aggregate liquidity fell off a cliff, there were no interested buyers and therefore no market for the investments that now littered balance sheets around the world.

Mark To Market

The theoretical goal for Mark to Market is to provide investors with transparent valuations that react quickly to changes in the market. Viewed from another perspective, it is to keep everyone honest. Both are admirable goals. However, due to its very strong tie to liquidity, bankers devised methods to leverage the tie when we were awash in liquidity.

To do this, bankers grabbed the sharp dual-edged Mark to Market sword and cut a fat swath of profit by creating and leveraging illusions of liquidity. This was easy and, to at least some degree, obvious; with excess liquidity and low rates for short risk-free returns, there was huge demand for higher than market cash equivalent returns. With high demand, you get high values and with that, you get a rush to fill the supply void.

Now that we are living in a world where there is precious little liquidity, the back side of this Mark to Market sword is cutting the value of these once inflated assets to ribbons and, with them, the world economy. Unfortunately, even as we bleed, those who have the power to set the sword down, letting time and reconstruction actions initiate the healing process, refuse to let go.

The Cure

Make no mistake, the rules governing valuations should not be changed willy-nilly. To a great extent, the belief that the rules of value are inflexible is the cornerstone of trust and trust is the most important component of value; much more so than liquidity or even return on investment. Due to this, I don’t take lightly at all weighing in against Mark to Market policies. However, after giving it careful thought, I continue to believe it is a flawed policy that does not support its goals and should be suspended if not permanently replaced.

What the banking industry terms as “non-performing assets” are not the core of our problems today. While there are clearly assets that are not performing to contract (foreclosures, etc.) and in fact the percentage of them is higher today than usual, the majority of the core long-term assets supporting this mess are performing to contract. In other words, while the secondary assets like, but not limited to, ARS’ no longer have the liquidity to be considered cash equivalent investments and therefore should no longer carry the premium associated with cash equivalent investments, the underlying long-term core assets from which they were spawned are not necessarily non-performing assets.

Based on this thinking, I believe holders of assets should have two choices with one being Mark to Market. However, in my view, Mark to Market would only be an option if the value of the asset was being declared at par (face value) or less. The other option, which I’ll call for now “NPV” (Net Present Value) would be required if an asset is being represented at a value higher than could be supported with Mark to Market or at any value above par.

NPV would give the asset holder the option to provide copious transparency into the construction of the asset. In addition to requiring the holder to fully define the asset, it would require the holder to gain a fresh rating from an independent agency based on the asset’s value when held to full maturity. In other words, the value of an ARS would be based on the full term of the underlying debt and the rating of that debt and then be discounted against the risk free rate of return. With this, the holder would then factor the NPV (a well defined calculation).

Why This is Important

There is no shortage of pundits anxious to point fingers at what caused the mess we are facing today. While it may be true that history will show us there was one cause, until we know that, I think the better way to view our situation is that it was caused by a convergence of events that have created a self-feeding negative spiral. In this, Mark to Market policy is calorie rich food.

One of the classic ways to defeat an enemy, particularly if you don’t know how you might fare with a frontal assault, is to cut off the enemy’s supply of nutrition. While we most certainly should not relax the regulatory policy of our financial institutions, particularly when these policies address something as core as value, we need to be open minded enough to recognize when bad policy is working against our collective interests. There are a number of policies today, Mark to Market being only one, that are food for our enemy.”

Member 4 again: “Suspending M2M is a No Cost Step – Here’s a step that would actually increase tax revenues and stimulate the formation of capital.

If your business is down and aggregate demand is slack, what do you do; raise prices or lower prices (have a sale)? I know your answer, but our government doesn’t agree.

Of course, you lower prices in hopes that higher aggregate revenues will help you meet fixed costs and maintain enough market share to where you are well positioned when demand improves.

John Chambers estimates that if the government would have a “sale” by lowering the cost of repatriating foreign profits it would collect roughly $37B in federal income taxes and, by my estimate, slightly more in state income taxes. In the process, it would bring about $700B into the U.S. for investment. Personally, I’m inclined to trust Chamber’s numbers – CSCO currently has about 90% of its liquid cash equivalent assets trapped outside the U.S.

The Senate discussed including this in the stimulus package, but summarily decided against it. You see, according to Senate math, 35% (the full tax rate for repatriated foreign profits) times near zero repatriation would cost us over $200B. In other words, 35% of nothing, according to Senate math, is greater than 5.25% (the proposed temporary discounted rate for repatriation) of something.”

GTF Member: “I thought the problem was that these individual mortgages were bundled in such a way and sold as package deals as to make it nearly impossible to unbundle them to separate out the individual mortgages?

Consequently a few rotten apples spoil the entire barrel? The actual real estate didn’t go anywhere. But the underlying paper is in a netherworld…sold like hot merchandise….fenced by Mazerati driving investment bankers….to unsuspecting foreign pension funds….who now hold worthless paper?

Every owner of real estate should demand of their lender to see all the legal documents securing their property. If the proper paperwork can’t be produced in a timely fashion….within a deadline….then that debt should be wiped off the books and a new deed issued to the owner. If the lender’s portion of the equity is marked to zero, then possession should be nine tenths of the law.

Just a brain fart.”

GTF Member: “My only insight is that the economists in Washington are all trying to avoid the Japanese trap of pretending their banks were solvent for a decade when they were not. It is a conservative accounting impulse to recognize reality and not allow the banks to perpetuate delusory balance sheets. I think the mark-to-marketeers are wrong, that mark-to-market creates not a purchase on reality but a depressionary delusion. But it would help if someone would cogently refute the Japanese precedent.”

GTF Member: “One of the very important points in the M2M debate that I’ve not seen addressed anywhere but in the post above is that it significantly juiced calculated valuations when there was high liquidity. That is exactly why investment banks repackaged long-term debt into instruments that could be sold as cash equivalents. M2M created an implicit carry trade that was very lucrative.

Me: “Could you explain this to me in a little more detail? My Financial Knowledge is limited and I don’t understand a lot of the jargon.

My argument is that the balance sheets aren’t delusory, but that they are making them Mark down the 92% performing ones on account of the 8% in default, even when they are being held to maturity. I’m also trying to say that it’s the government itself marking the assets down that has frozen the market, that its not free market pricing.

I guess I need to look up exactly what Mortgage Backed Securities are. Are they securities that are a mixture of Mortgage debt with other types of debt or securities, and was the Mortgage part of the equation unfairly taken down on account of the vulnerablity of these other instruments thus exacerbating the housing meldown?“

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2. The Unnatural Phenomenon of Inflation
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If Congress had not required through law that Freddie Mac and Fannie Mae securitize loans to people who did not qualify**, the sub prime crisis, “ground-zero” of the whole thing, would have never begun. But even so, Sub Prime was only 1% of the mortgage market. It was not big enough to cause an entire Financial meltdown. What caused this brush fire to spread into a full blown conflagration of epic proportions was a simple but profoundly stupid regulation written in 1992 called the “Mark to Market” rule. Simply put, over the last 6 months banks and other financial institutions have had to write down enormous amounts of assets to below par, even when those assets are being held to maturity, and still performing. What determines the “market price”? Buyers of course. But since the loans, the assets have been packaged with other financial instruments, including the common and preferred shares of the intitutions themselves, they become mixed together under a dark cloud of “will the Fed, Treasury, or FDIC declare them insolvent and wipe out their shareholder equity overnite?” What buyer will step into that market? And so since there is no “buyer” for the securities, the “market price” of the assets becomes determined to be pennies on the dollar. Enter “Mark to Market,” a standard that has no basis in FASB or GAAP accounting. In GAAP accounting a profit or loss on an asset is only taken when a transaction takes place. No transactions have taken place because the market is frozen with fear. Even if there was a “fair” market value placed on these assets, the banks would not necessarily be willing to sell them. It’s their business to hold them to maturity and to make interest as an income. That’s how banks make money.

So it merely becomes a vicious cycle: Regulatory agencies force financial institutions to mark down assets that can’t be sold because of the fear driven into the potential buyer by the cloud of the Regulatory agencies themselves.

There is no financial crisis. There was no lack of regulation. What we have is a regulatory crisis. The source of this problem which is ruining and has the potential to ruin the lives of millions, is the government itself.

Why was was this financial crisis a hoax? Because the establishment knows how to take advantage of the wild swings. You know the old say, “Buy when there’s blood in the streets”? Creating “blood in the streets” is an opportunity for them, at the expense of the people. What can we do about it? Become educated, let our voices be heard, register to vote, and support representatives who represent the people and not “special interests” who are the agents of the Establishment.

(*Update 2-22-09) – I’ve noticed today that many analysts are confirming part of my theory. Santelli, Mike Holland, David Malpass, among others have said repeatedly today that private investors who were for a while buying these ‘toxic’ assets at 27-30 cents on the dollar, pulled back when the shadow of the Government stepped in.

**The Community Reinvestment Act

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