[M]any of the â€œassetsâ€ that the banks hold are not real assets and hence do not have real value; they are largely derivatives, that is, side bets placed on the movement of some particular market, say interest rates or housing values. Right now, everybody is knows that housing values are in the tankâ€”and are likely to get worseâ€”and both the mortgages and the derivatives are not worth much, and certainly not worth their nominal values.
Since the banks’ assets are not worth anything, the banks are insolvent and can’t make loans.The Republicans want to allow the banks to use â€œmark-to-modelâ€ to value these assets. What does this mean? The SEC puts it this way:
When significant adjustments are required to available observable inputs [that is, the market price] it may be appropriate to utilize an estimate based primarily on unobservable inputs. The determination of fair value often requires significant judgment.
Wow! Let the banks value their assets on â€œunobservable inputsâ€ and use â€œsignificant judgment.â€ One might note that the observation of the unobservable requires a certain mystical vision which this writer has never experienced, but which seems to be part and parcel of the Republican Religion. Still, it seems strange that a religion which makes a fetish of the market to determine real value now proclaims the insufficiency to the market for that purpose and hence we must rely on mystical visions of unobservable inputs.
MÃ©daille’s blogging at times like these is greatly appreciated. For when good men don’t blog, bloggers are left to libertarians for economic advice.