This makes sense. The only person I saw talk abou...

2008-12-02T13:32:00.000-08:00

This makes sense. The only person I saw talk about Mark to Market was the chairman (or CEO) of AIG, and he said that was the cause of the problem.

Most of us think the problem is foreclosures, but that is in the Billions and we are throwing Trillions at the problem which makes no sense to me.

[I wish this blog used Disqus]

I'd like to comment on the following piece from yo...

2008-11-27T14:18:00.000-08:00

I'd like to comment on the following piece from your blog:

"So Government get rid of Mark to Market, and let the banks Mark to Maturity. Any bank marking to maturity should subsequently be required to hold that underlying asset until either it is sold at par, or till it's maturity."

It is too late for this. Mortgages have been securitized so there isn't an identifiable asset for the bank to mark to maturity or sell at par. i.e. there isn't the $500K mortgage tied to House X.

that chart is great but it doesn't go far enough o...

2008-11-27T07:21:00.000-08:00

that chart is great but it doesn't go far enough out on the NASDAQ. If you take the NASDAQ out to today, it's at roughly 1500 having bottomed at roughly 1300 last frday.

just like the DOW in the 1930s, the NASDAQ has indeed been through a terrible run. But just like the DOW finally bottomed in early 1938, the NASDAQ may have bottomed last friday.

history does repeat itself but you just need to know where you are in the timeline

Andrew, I totally agree that bailouts are actually...

2008-11-22T07:01:00.000-08:00

Andrew, I totally agree that bailouts are actually worsening the situation, in the long run. It's alarming how almost all governments around the world are mindlessly increasing state deficits with risky bailouts. This simply shifts the underlying problem to a higher, even worse level (state bankruptcies or inflation like in Zimbabwe vs. bankruptcies of some, even major private companies).

Bailing out as observed would probably work under the following conditions:

1) The base markets are healthy as such, what we currently experience is an emotional exaggeration only

2) State deficits are reduced quickly again after markets recovered

I think most people are still too optimistic in regard to 1). The basic problem isn't the current emotions in the market, it's the emotions that were fed during at least the last two decades. We simply bet on values that didn't exist and won't exist anytime soon (i.e. not as soon as expected). This used to work for quite a while, so everybody was happy and helped growing the bubble. However, with all bubbles it's just a matter of time till they burst. And we can all hope they burst rather sooner than later to minimize the impact of the explosion.

It's true that mark to market can start a downward spiral as we currently see it in the markets. It's literally deadly for many businesses and individuals, however, it has the benefit of sucking the air out of the bubble quickly, resulting in a hard but quick landing on solid ground.

Mark to maturity would take some of the momentum out of the downward spiral, but I doubt it still worked as well as intended anyway. By now, enough people realized they were betting on air to keep the spiral going. Let's remember that values at maturity are speculative by nature (unless hedged). Air won't turn into gold (or food) just by waiting longer. The basic assumption is a healthy economic development, i.e. steady growth and eternal increase of productivity. Both of which are less than certain as the world is finally starting to realize that the theory of steady growth and productivity increase is flawed. From this point of view, mark to maturity indeed promotes growing bubbles (or in the current case, delays the landing, making it a bit softer, less shocking, but more frustrating, as it takes longer).

My take is that we need to get to solid ground to get confidence in basic values again, so we can restart at smaller, realistic and sustainable growth rates.

So, 1) isn't met, which alone is reason enough against bailouts already. What about 2)? As 1) isn't met, 2) won't be met either. Even for states, the future growth rate (after hitting the ground) will be too small for a quick payback within one or two presidential terms. So basically, all that bailout money is indeed lost money either paid through taxes (further supporting false assumptions and wrong incentives). Or it isn't paid for at all, risking high inflation and finally a state's bankruptcy. Experience shows that governments almost never reduce deficits. Usually, the best they achieve is slowing down further debt, giving the economy some more time to catch up and improve the debt ratio.

What's my advice? It's "keep it real". Let fail what has to fail anyway. Let's no longer pretend that air is gold, let it be air again. Expectations need to match with reality and very basic values again. Punish those who deserve it - if you don't, don't be surprised if they continue to exploit the system at the cost of the fair people. Minimize governmental market interventions, even if other governments do the opposite - in the long run, you'll have the stronger, more reliable economy.
This means: People who can't afford it won't be able to buy housing, cars, new TVs and so on. Modesty is trump. Credits both for private households and businesses will be much smaller. Sluggish businesses with an offering that doesn't meet the market (think of many major car manufacturers) will fail, creating new opportunities for more agile, more sustainable businesses. Lots of businesses and individuals won't survive this crisis, but that's just how it is. There's no "too big to fail".

Comments on Random Thoughts in Marketing: The Great Debtpression

This makes sense. The only person I saw talk abou...

I'd like to comment on the following piece from yo...

that chart is great but it doesn't go far enough o...

Andrew, I totally agree that bailouts are actually...