FASB Rule 157 (aka “fair value” or “mark-to-market”) should be suspended, but no, it alone will not solve the crisis.
Newt Gingrich has suspension of this rule as one part of his program to solve the crisis. It will stop credit ratings downgrades of otherwise solvent banks with good loan portfolio.
The real problem is that the market is frozen, not liquid, and nobody will take on the risk without knowing it’s backed by the entity that can hold this paper for a long time (till maturity or until it can be sold for a decent value when RE market stabilizes), the only entity being the government. Paulson is trying to inject liquidity into frozen market and “get it moving again”, there is no “fat cat bailout”. $700B is simply an oversized line of credit, most of which may not be used, some of it may go bad and some of it may make money because assets will be acquired on already discounted “fair value” basis, only not in the market in which “fair value’ equals Zero because nobody wants to risk or has capital to buy, even at discount.
Real crisis is only in 4 or 5 states, but in deflation everybody expects and waits for prices to go lower, so market is stalled. Of course, the goofy Dems’ proposals for judges rewriting credit card debts or mortgages, or “protecting” from foreclosure people who can’t pay the mortgage will only stop the market from functioning, i.e will make things even worse, with or without government line of credit, and thus entire plan would be worthless with these provisions.
With Fannie and Freddie finally explicitly nationalized, the bulk of “low quality” loans should be already taken care of. But paper for other banks is mispriced because market for it doesn’t now exist or function properly. That’s what Paulson is trying to solve, because it will not get solved by itself, even after much damage to the economy - most of which will spill over and be felt on Main Street, not Wall Street. We can do it now, or we can do it later, but access to capital is essential for capitalist society to function. Stupid government policies (CRA, FNM, FRE etc.) created the situation, they now need to solve it so capital can be “unclogged” and returned to the economy.
the more I understand the alternatives and the paulson plan, the more I realize that these alternatives just aren’t enough.
When the doctor says you need surgery, OF COURSE you have to ask for a second opinion. But sometimes you really need major surgery.