A Simple Financial Solution
Everyone seems to be talking about the economy now. Even people that normally "dislike" Economics, etc. seem to be interested in the trend of the Dow Jones, etc. Furthermore, with Congress screaming "Armageddon!", it seems as if the world is about to end. But is it really? Such corrections in the market have occurred before (Dot Com bubble burst, Black Thursday, etc.) and the U.S. and the economy survived. Even the Great Depression was not the end (though through the U.S. government it was prolonged). Now understand, I am not happy about what is happening, but much of it is contrived. Much of the problem has come about from greed and improper government interference. In fact, many of the people who caused the problem are the SAME ones trying to "fix" the problem. Now that's scary! Unless, of course, you enjoy living in the United Socialist America.
What can be done to fix the situation? Well, actually there are several solutions. One of the easier and actually "common sensical" solutions would be to remove the Mark-to-Market accounting (a.k.a., Fair Value accounting) requirement and allow the companies to actually free up capital thus improving the liquidity status. Here are some definitions of the Mark-to-Market accounting process:
1. The act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value. This is done most often in futures accounts to make sure that margin requirements are being met. If the current market value causes the margin account to fall below its required level, the trader will be faced with a margin call. (WSJ)
2. In terms of mutual funds, a MTM is when the net asset value (NAV) of the fund is valued upon the most current market values. Mutual Funds are marked to market on a daily basis at the market close so that investors have an idea of the fund's NAV. (WSJ)
Furthermore, such accounting methods have consistently led to fraud in the financial arena. (Like we need more of that!)
For more information, check out Forbes.
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2 comments:
Even the Financial Accounting Standards Board’s couldn't figure out how to deal with the mark-to-market accounting shortly after the Enron debacle. Even the Arthur Andersen accounting firm had problems with it which led to its failure too. Enron filed for bankruptcy 2001. The Financial Accounting Standards Board’s has had 7 years and they did nothing. nomedals.blogspot.com
Ya'lls banking knowledge overwhelms me.
Signed - safe in France :)
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